Thursday was the first time Arrium investors got to trade shares in the iron ore, mining hardware and steel group since Monday's announcement that it would raise $754 million in a deeply discounted share issue, and they vented their spleens. The interesting question is whether they overreacted.
Arrium's share price was 73¢ and the iron ore price was $US93 a tonne on August 19, when the group announced an 83 per cent rise in earnings for the year to June, and paid a dividend.
Iron ore had fallen to $US82 a tonne by last Friday, and Arrium's share price was down to 65¢. Then on Monday, the group announced its huge equity raising, and said it would be priced at just 48¢ a share.
It said on Thursday it had got the $367 million institutional slice of its share offer and a $98 million share placement away, but it was a struggle.
Institutional shareholders bought only 79 per cent of their share issue entitlements. Shares not taken up were tipped into the placement book-build and sold at 48¢, right on the floor price that Arrium's adviser, UBS, agreed to underwrite.
UBS is also underwriting the $289 million retail shareholder balance of the share issue, and it is exposed after Arrium's share price plunged to 40¢ a share on Thursday on heavy turnover of 132.6 million shares.
Cold maths suggests the thrashing Arrium received was overdone. The group is boosting its issued capital by 1.15 times, and collecting $754 million of new equity. That suggests the investors who priced Arrium at 65¢ a share last Friday should be pricing it about 56.5¢ now: the iron ore price has done nothing much in between.
There are shareholders who are angry that a company that presented an upbeat profit report and paid a dividend on August 19 could go cap in hand to shareholders a month later.There are also concerns the $754 million debt down-payment the share issue funds will be not be enough if the iron ore price rout continues.
Institutional shareholders who did not take up the offer almost certainly led Thursday's selling: at least one big shareholder was already reducing its stake before the announcement of the issue.
At Thursday's closing price, Arrium isn't expensive on paper. Broker valuations done since Monday's issue announcement average 57¢. Arrium's broker UBS (70¢) and CIMB (35¢) are the outliers. Nine other brokers are between 46¢ and 66¢.
Those valuations and an implied value at 40¢ a share of 4.3 times estimated 2014-15 earnings before interest and tax for Arrium incorporate iron ore price forecasts that in most cases don't reflect the ore's latest price slide, but even then some investors might be tempted.
Arrium's EBITDA multiple is in line with a lower-cost iron ore miner, Fortescue, but it is well below fellow steelmaker Bluescope Steel (5.6 times) and fellow mining products supplier Orica (7.3 times), for example.
Arrium and UBS will be hoping there are enough investors prepared to do the maths, put concerns about the iron ore price aside, and push the shares up before the $289 million retail shareholder slice of the offer closes.
Canny deal by ASX chief
ASX chief executive Elmer Funke Kupper announced a small but canny deal on Thursday – to pay $65 million for a 49 per cent stake in Yieldbroker, owner and operator of a local electronic market in over- the-counter debt derivatives.
Yieldbroker is a venue for Commonwealth Bond tenders among other things, and ASX is quite deliberately not buying the entire business.
The other shareholders who will sell pro-rata into the takeover offer are ANZ, Commonwealth Bank, Citigroup, Deutsche Bank, JPMorgan, Macquarie, National Australia Bank, RBC, RBS, Toronto Dominion, UBS and Westpac.
Between them, these banks account for the lion's share of the trade in $A and $NZ exchange-traded and over-the-counter fixed interest derivatives. Funke Kupper is therefore creating a derivatives market alliance with his and Yieldbrokers' most important customers.
The deal is another piece in the derivatives market jigsaw that Funke Kupper has been putting together, and creates interesting options for ASX's derivatives business, which is already its largest, accounting for 28 per cent of revenue in the year to June 30.
ASX raised $553 million from shareholders in June last year to capitalise its futures and derivatives clearing houses in line with tougher post-crisis international standards. It has also launched derivative products of its own.
Its big presence is in exchange-traded products, however. The link with Yieldbroker is going to create options to mingle and expand the OTC and exchange traded offers on both platforms, and also to save money by using common systems infrastructure.
