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Port Elizabeth - Is it arrogant if a company requires a minimum investment of R1m per investor when it issues new shares?

Rockcastle Global Real Estate, listed on the Stock Exchange of Mauritius (SEM) and the AltX of the JSE [JSE:ROC], announced recently that it is looking to raise around R650m in new capital by way of issuing shares via a private placement.

Shareholders registered on the company’s SA share register will be offered 26.6 million new shares at R20.25 per share to raise just less than R538.7m in new capital.

Shareholders on the Mauritius share register can apply for 5.5 million new shares at $1.83 each, meaning that the company aims to raise an additional $10m (R111.3m at the exchange rate of R11.06 used by the financial advisers to the transaction) form Mauritian investors.

It was the condition that SA investors need to invest at least R1m to be allowed to participate in the private placement that caught Fin24’s interest.

Companies would normally first offer new shares to its existing shareholders - irrelevant if the investors hold only a few hundred or few thousand shares each. It this way, an investor has the opportunity to maintain his interest in the company, even if the interest is only 0.000001% of the total issued shares.

It only seems fair, especially if new shares are issued at a lower price than the prevailing market price. Rockcastle is offering the new shares at a small discount of around 4.7% to Thursday’s closing price of R21.20.

In this case the new issue is fairly small - increasing the issued share capital by less than 5% - and a private placing is probably the most cost effective way to raise new capital.
 
Mauritian shareholders need only to subscribe to a minimum of $20 000 worth of shares (around R221 000) to be eligible to participate in the private placing.

Management says that the new capital will be used for new investments in established listed real estate companies, as well as direct investments in selected properties worldwide, but the latest results indicate that Rockcastle might be tempted to shore up its working capital instead.

The financial statements for the year to June show the value of its portfolio in listed property companies as $1 565m (R17.3bn) of which some 42% is invested in US property companies. Around 30% is invested in properties in Singapore and Hong Kong.

The financial statements show that net asset value amounted to just more than $980m at the end of June this year. The difference between the total value of the investment portfolio and the net asset value is obviously the company’s debt.

A very interesting “asset” in Rockcastle’s balance sheet is an amount of $17m (R188m) described as Rockcastle management incentives loans.
 
The income statement makes equally interesting reading. It shows dividend income of $54m from Rockcastle’s investment portfolio and a gain of $105m in the value of its listed securities worldwide.
 
The unrealised profit of these investments is correctly included in the income statement as per accounting standards, but the result of interest and cash operating costs result in an operating cash flow of only $42m.

The operating expenses increased to $1.33m in the 12 months to June 2014 compared to $553 000 in the previous financial period that comprised 15 months.

Rockcastle showed a foreign exchange gain of $6.9m, but a loss of $8.6m on transactions in the bond market and another loss of nearly $4.7m on transactions in interest rate derivatives.

These small losses add up, resulting in a situation that Rockcastle’s current liabilities exceed its current assets by far. Current liabilities at the end of June were $283m compared to its current assets of only $19m.
 
Management might have to liquidate some investments, or use some of the proceeds of the new share placement to shore up its short term funds.

- Fin24

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