APA Renounceable Rights Issue is Bad for the Small Investor

I received a thick wad of information in the post yesterday about a 2 for 7 renounceable rights issue from Australian Pipeline Trust. The rights are to purchase additional APA shares at $3.75 (a discount of around 15% to the current share price). Sounds OK, doesn't it? Well, yes, for most investors it's OK, even if not the windfall some may think. (As the new shares issued at this reduced price tend to make the share price drop for your current holding, so it all generally averages out - the only real benefit is that the company is getting funding at a better rate than it could get elsewhere).

However, while I'm OK with having to fork out around $3,800 to take up the rights issue (in fact I sent it on to my margin lender today, so the amount will simply be added on to my margin loan balance, so it won't affect my cashflow), some smaller shareholders may find themselves losing out. If they do not take up the offer, then the rights expire with no value, and the underwriter will, in effect, purchase the relevant number of shares that would have been issued. In this case the small shareholder will get no immediate benefit from the rights issue, and will suffer from having the share holding interest in the company diluted by the new shares issued to other shareholders and the underwriter.

Theoretically any shareholders who don't want to take up the rights issue can sell their rights on the market and get a benefit that way. But there are a couple of obstacles facing the smaller shareholders:
* the trading of the rights ends on Monday, and the offer document only arrived in the post yesterday. Any small shareholders who are unsure what to do, or don't currently have a relationship with a broker, doesn't have much time to take action.
* A small shareholder with, for example, $1000 worth of APA shares (around 235 shares) would have received rights to purchase an additional 67 shares at $3.75 - a cost of $251.25. But, if they didn't want to buy more APA shares, then they'd have rights worth AT MOST $33.50. Even at discount brokerage rates it would be hard to sell such a parcel for more than the brokerage costs!

APA has chosen to restrict the rights offer to Australian and New Zealand shareholders, as it would be too expensive to print relevant documentation for other foreign shareholders, given the different laws and regulations applicable to such an offer in other countries. For FOREIGN shareholders, APA will sell the relevant number of rights on market, and send the proceeds to such foreign shareholders.

If APA had the best interests of small shareholders in mind, they would have used the money obtained from the underwriter for all expired rights to make similar payments to any Australian or New Zealand share holders who didn't sell or accept the rights offer.

Saving money when buying real estate

Although the overall returns from real estate are similar to that of stocks in the long term, there are some aspects that make real estate less attractive to some investors:
* its price isn't known daily like the quoted stocks, only when a sale is made. Between sales estimates based on similar sales in the area have to suffice
* it can only be bought and sold in large "chunks" - as they say, you can't sell off one bedroom of a house if you need some cash
* there are relatively high transaction costs compared to buying and selling shares - compare typical stock brokerage fees of less than 1% to real estate agents fees of over 5% in many cases.

At long least competition appears to be starting to reduce fees somewhat. For example AlCan Realty Partners, LLC is offering a 1.5% cash rebate at closing when purchasing Dallas Real Estate. Their website currently lists 50,567 properties. Hopefully similar rebate schemes will become common in all areas, and competition will force other agents to reduce their commissions.


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A Word a Day: "Dividend Yield"

A numerical measure that relates dividends to the current share price and puts ordinary dividends on a relative (percentage) rather than an absolute (dollar) basis. This makes it easier to compare the yields of different stocks.

The average dividend yield of the whole market (or a particular segment) is often compared to the typical (long-run) average dividend yield in order to determine if the market (or segment) is over-priced, fair value, or under-priced.

This is only an approximation however, because the dividend yield calculation is based on historic dividends and the current share price to try to predict the future. Some analysts will modify this measure to make use of estimated or "prospective" earnings to decide if current prices are fair value. Of course this is only as accurate as your estimation of prospective earnings.

Indebted and desperate

It's amazing what people will resort to when then are in debt and can see no way out. For example, the company Seasoned Trade Lines has a website detailing how people who have very bad credit ratings, or are even in bankruptcy can make use of established ("seasoned") verifiable credit card accounts with perfect payment histories dating back to 1976 to improve their credit rating by "up to 200 points".

While it is true that a few people may become bankrupt because "sometimes in life bad things happen to good people", you would think that most people who have to file for bankruptcy have gotten into trouble by abusing credit to enjoy an unsustainable lifestyle. I'm sure the number of people forced into bankruptcy running up debts to pay for life-saving medical treatment are in the minority, and probably not the target audience of companies such as Seasoned Trade Lines.

Making use of such a "credit repair service" (at a cost starting from $1,000!) so that when you're a bankrupt "our way of life should not have to suffer for
7 to 10 years because of it" is evidence of just how desperate people in dire financial straits can become. Often the easy way out becomes just too enticing.

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