On March 24, shareholders of TM International Bhd (TMI) will vote on a proposal for a RM5.25 billion rights issue but so far, no details of its pricing and ratio have been forthcoming. In a departure from the norm, such details will only be announced on March 27, according to a newswire report.

Meanwhile, shareholders will have to make their decision based on TMI’s circular to shareholders, which provided a maximum dilution scenario where total shares could balloon to nine billion from 3.7 billion, if the rights shares are issued at the minimum price of RM1, which is TMI’s par value.

This lack of information has sparked speculation: whether TMI would face a free float issue if the rights issue is unattractively priced and results in its three largest shareholders taking up the bulk of the new shares.

TMI’s main shareholder Khazanah Nasional Bhd has already committed to taking up an additional 20% of the rights issue, on top of the 44.5% it is entitled to, potentially giving the state investment arm a total of 64.5% of the rights issue. The Employees Provident Fund is expected to take up 15.76%, while Amanah Raya Nominees Sdn Bhd will likely subscribe to its entitlement of 8.52%. Together, up to 88.78% of the rights could be taken up by the three biggest shareholders.

In other words, in the event that few or none of the other TMI minority shareholders take up the rights issue, TMI may face a free float issue. Khazanah is seeking an exemption from making a mandatory offer should its holdings increase by more than 2%, or to more than 50% in the event of an undersubscription of the rights.

While it is premature to speculate whether TMI will be pricing its rights issue attractively to ensure take-up, this free float issue might be something shareholders want to raise at the EGM as there is room for imagination in TMI’s case, given that the details will only be known on Friday, a whole month after the company first made known its intention to make a cash call on Feb 26.
In recent weeks, TMI’s share price has taken a beating, as had other companies that made such cash calls. Surely, management knows the share price is bound to be beaten down due to the uncertainties surrounding the exercise. Then, why not spell out the parameters from the start?

To borrow OSK Research deputy research head Jeffrey Tan’s words, the lack of details on TMI’s planned exercise has “led to confusion amid escalating concerns and uncertainties over the magnitude of dilution that minority shareholders would have to stomach”. Its share base could potentially balloon from 3.7 billion shares to 9 billion shares if the rights shares are issued as low as RM1.

TMI’s group chief financial officer Datuk Yusof Annuar Yaacob says the reason that only the amount it intends to raise has been fixed and no other details have been announced is because the company does not want market forces to hamper the amount it intends to raise from the exercise.

That, however, does not give shareholders much comfort because the broad parameters provided in the circular does not help them to make an informed decision. One cannot help but notice that Malayan Banking Bhd, which is seeking to raise about RM6 billion from its cash call, had announced its 9-for-20 ratio right from the start. The price of the rights issue was fixed at RM2.74, four market days after the official announcement.

Singapore’s Chartered Semiconductors Ltd, which has seen its equity base severely depleted due to mounting losses, had even more reasons to worry when it announced details to its rights offering upfront. Granted that Temasek Holdings Pte Ltd had undertaken to subscribe to its 59.4% entitlement and committed to take up to 90% of the issue.

In any case, the market has come up with some guesstimates on the likely ratio and pricing for the rights based on the level of discount recent rights issues have been priced at. Maybank’s 9-for-20 rights shares, for instance, were fixed at RM2.74, a 34.4% discount to the theoretical ex-rights price of RM4.17 and a 43.2% discount to its closing price of RM4.82 on March 5, the price fixing date.

TMI has indicated to analysts that the rights will be priced at 30% to 40% discount to the price the stock is trading at on the price fixing date. However, this has not been officially confirmed.

The simplest ratio for TMI to raise RM5.25 billion is a one-for-one rights issue, which is at RM1.40 apiece. This minimises odd lots. The dilution arising from this route is also substantially smaller than the worst case scenario of 1.4-for-1 at RM1.

In a note last Thursday, OSK’s Tan told clients there was a “trading opportunity” in TMI ahead of the pricing of the rights as prices may have found a bottom for now due to the RM1 floor pricing. A different trading note being circulated by a broker put the trading opportunity more bluntly, telling readers that TMI’s share price would need to hold up higher from last Friday (March 20 being the start of the five-day volume weighted average price) to ensure a good discount level and at the same time maintain the more favourable one-for-one ratio (versus 1.4-to-1).

Based on recent discount scenarios, Tan reckons TMI’s rights could be priced at RM1.12 to RM1.20, “implying an indicative trading target of RM2.40 to RM2.50”. If one were to assume that the rights would be a one-for-one priced at RM1.40, a 34% discount would imply the need for TMI’s share price to be at RM2.82 on the price fixing date (reportedly Friday), putting the theoretical ex-rights price at RM2.11, the report reads.

Whether or not prices were acting as predicted, TMI added 11 sen to close at RM2.35 last Friday, after adding eight sen to RM2.24 last Thursday. TMI shares had gone as high as RM2.39 intra-day on Friday.

But what if it is not the board’s intention to price the rights at an attractive discount? After all, at RM2.35, TMI’s share price is already down 71 sen or 23.2% from the RM3.06 it closed at when the exercise was announced on Feb 26.

This article appeared in The Edge Malaysia, Issue 747, March 23-29, 2009.