Assessing a Placing

What is a Placing?

A placing is a method through which a company can raise money - it involves a company tapping the equity markets through placing new shares. Say that Company A has a share price of 100p and a company wants to bolster its balance sheet by raising £1 million. If a company does not want to raise debt (as debt has certain problems such as interest repayments), then the company may opt for an equity raise, or a placing.

The number of shares that have to be issued are derived from the two numbers above: 100p (=£1) and £1 million, plus the costs that the broker charges. Placings usually involve a fairly simple process - a company gets its broker to contact a range of institutional investors, who are then treated as 'insiders'. That means that they now have access to inside information (that the company is raising cash), so they are not legally allowed to trade their shares or inform other parties. The broker takes a charge on the amount raised, usually as a percentage or flat fee. Let's assume that the broker charges 8% of the proceeds so on £1m that is an £80,000 charge. The company therefore has net proceeds from the placing of £920,000. In reality there may be a few other small costs.

It's important to recognise that, since placings involve the issuing of new shares, items such as Earnings Per Share are impacted negatively. Therefore, it's in the interest of investors that placings are completed on attractive terms to minimise the impact of dilution.

Assessment Factors

Being able to assess the terms of a placing can provide valuable insight into what the market thinks of the company in question, plus it can help to ascertain future price movements. We can do this through evaluating against a range of assessment factors. These are some of the main factors to assess a placing against.

1. The Scale of Dilution
 
This is a fairly simple point to measure. Say that Company A has 100 million shares in issue before a placing. If 50 million shares are issued during the placing, then the scale of dilution is 50%. On the other hand, if 20 million shares are issued during the placing, then the scale of dilution is 20%. Generally speaking, the higher the scale of dilution the worse it is, and that can be related to investors participating in the placing, selling on their shares in the market, which can create downward pressure on the share price. However, do note that this is a less important factor than some of the other points, especially 2 and 3.

A simple method for measuring this can be used although the brackets can be adjusted

0% -> 15% dilution = Low                    15% -> 30% = Medium                    30%+ = High
 
  2. The Level of Discount/Premium

This is the most important factor. When a placing occurs, shares are issued at a particular price relative to the current price. In the vast majority of cases, the shares are issued at a discount to the mid-price and that can create a problem for shareholders. As above, those investors who took part in the placing may feel compelled to cash in and take their profit immediately. In a large proportion of cases, when shares are issued at a discount (without good reason), the company's share price is dropped immediately, reflecting anticipated weak investor sentiment

In the uncommon event that the shares are issued at a premium, that is a very positive sign as it shows that the company has been able to convince one or more parties that the company is worth more than the market is attributing.

However, the opposite also holds true. If there is a large discount (over 20%), then it can be argued that there was not a party willing to back the company at the current price, hence why they wanted a discount to fund the company. That is a negative sign and might suggest that the company was previously overvalued. The level of discount is often related to the liquidity of the shares. If the company is very illiquid, then discounts tend to be larger given that the funding party is adhering to more risk.

It is also important to check the level of discount/premium against the 30-day price as it can be the case that the shares get sold down before the placing (through insider trading, which is illegal). The easiest way of checking that is to look at the placing price is relation to a price chart.

A simple method for measuring this can be used although the brackets can be adjusted. These prices compare versus the current mid-price. These ranges are sensible for smallcap companies. Larger cap companies should take less of a discount so adjust accordingly

0%+ = Excellent      0% -> -10% = Good      -10% -> -15% = Fair      -15% -> -25% = Bad      -25%+ = Severe

3. The Reason for the Placing

The reason for a placing is also very important. If the cash is just used to plug a gap in the company's books, then that may not be read positively. The level of discount can assist in seeing how positive the placing is. You can also examine this through seeing if the company is profitable, and checking whether they were forced into a placing in order to keep operating.

On the other hand, is the company using the cash to make a value-enhancing acquisition, or to fund growth? Check the associated text that the company uses for reasons behind the placing, but beware that on many occasions that it can be hyped and lead you to the wrong decision. Therefore, always back your own opinion of the fundamentals first, and see if the reasons given by the company match a positive reason. If so, that is good. On the other hand, if you are not convinced by the fundamentals, but the company says the reasons are positive, then read into the reasoning with scepticism.

4. Are any Directors taking part in the Placing?

This is equivalent to looking at director buys. Both the presence and size of director buys are important, and is normally a positive sign. For further information on assessing director backing, take a look at this tutorial.

5. Who took part in the Placing?

Who were the parties who took part in the placing? This may not be disclosed, but in the case that it is (if a holdings threshold is crossed), check who the party is and look at their past record. Are they a specialist investment firm? Are they a company who operates in the same sector? Or are they a company who have a track record of selling down their holding very quickly post-placing?

Through this, and combining it with the level of discount/premium, you should be able to form an opinion on whether the new investors will be interested in holding for the long-term, or just the short-term. If the latter, you could expect downward pressure to be put on the share price.

Finally, was the placing oversubscribed? If so, that is a positive sign

A Couple of Examples

Let's take a look at two different examples matching the details to each of the five checkpoints above. RNS' for placings are usually entitled "Placing...", or "Issue of Equity". Click the blue text below to open up a copy of the placing announcement

A. Kibo Mining (LSE:KIBO) - 14th July 2014

1. 34.3m shares being issued is equivalent to 20% dilution. £600,000 in gross proceeds raised: Medium

click to enlarge
2. Pre-placing the share price was 2p. The shares were issued at 1.75p, so there was an immediate 12.5% discount. However, if you look at the chart on the right, the placing came right near the bottom of the trading range, hence the level of discount (taking a 3-6 month view) is Severe. It would appear that the market worked out that a placing was likely beforehand

3. No explicit reason given. Most likely to keep funding operations, which is a negative sign and it would appear that they had little choice but to complete a placing

4. Yes - "All of Kibo's directors are participating in the Placing for a cumulative amount of £100,000, and will be participating on the same terms as other investors." That is positive, especially given the extent of the backing

5. No indication given, although the placing was noted to be oversubscribed, which is positive

Overall - In this case it is not surprising for the placing to be oversubscribed, since the placing has taken place at a very low and depressed price. That suggests a lack of market confidence, even though the directors purchased a respectable amount of shares. On the whole, not a positive placing

B. EU Supply (LSE:EUSP) - 16th July 2014

1. 4.09m shares being issued is equivalent to circa 7% dilution. £1.35m in gross proceeds raised: Low

2. Pre-placing the share price was 31.5p. The shares were issued at 33p so there was an immediate ~5% premium - very encouraging since very few placings are conducted at price premiums. Looking at the long-term chart, the placing price still looks highly respectable as the share price is now near the lows of a trading range. It suggests very good backing for the company at current prices. Excellent

3. "The net proceeds of the Placing will be used to strengthen the Company's balance sheet, provide working capital to support the growth of the business as it expands and aims to gain market share and to provide additional funds for sales and marketing."

The final line is immaterial, as that is obviously the company's aim - to be a success! The placing looks to boost the balance sheet as noted and that looks a fair reason

4. Yes - "Steffen Karlsson, a non-Executive Director of the Company, has subscribed for a total of 606,060 New Ordinary Shares pursuant to the Placing at the Placing Price." That is equivalent to a £200,000 purchase so is an impressive vote of confidence, especially as it is just from one director. Highly positive

5. No indication given except that there are institutional investors taking part. Given the price premium, they will probably hold the shares for at least the medium-term (6 months), which is positive yet again

Overall - A sensible placing for a common reason (strengthening the balance sheet). Low dilution, excellent placing price and good board backing all make this placing positive from an investor's perspective