The Bluescope letter on retail allocation

December 6, 2015

Below is the letter sent to Bluescope Steel chairman Graham Kraehe and the full board lobbying for there to be no retail scale-back in the $616 million retail offer. In the end the board gave 99.9% of shareholders everything they asked for.

Mr Graham Kraehe
Bluescope Steel Ltd

By email

CC All Bluescope directors

Monday, June 1, 2009

Dear Graham,

I'm writing to you about the board's coming decision this week on any scale back in Bluescope Steel's retail entitlement offer.

As a small investor in more than 600 Australian companies I've been getting deluged with capital raising offers in recent months.

The vast majority of the entitlement offers from the likes of Wesfarmers, Suncorp, Fairfax Media, Alumina, Onesteel, SP Ausnet, Stockland, APN and Billabong have allowed investors an unlimited ability to apply for additional new shares over and above their entitlement.

The likes of Suncorp, Macquarie Office, Avexa, Peet, Ceramic Fuel, STW Holdings and Dexus have applied no scale back to these applications for additional new shares.

From everything I've seen so far, there have only five examples thus far of retail investors having their “overs” scaled back. They are as follows:

Fairfax Media: the limit was 3 times the entitlement or 50,000 shares and this led to 98% of applicants for additional new shares being satisfied. See announcement here.

Wesfarmers: the limit was 3 times the entitlement or 1,000 shares and this led to 95% of applicants for additional new shares being satisfied. See announcement here.

Onesteel: the limit was 3 times the entitlement or 18,000 shares and this led to 99% of applicants for additional new shares being satisfied. See announcement here.

Alumina: the limit was 3 times the entitlement but with no minimum and this led to more than 2000 small shareholders being left unsatisfied. See announcement here.

DUET: the limit was 3.5 times the entitlement but with no minimum. See announcement here.

In the case of Fairfax, Wesfarmers and Onesteel, the scale backs all occurred well within the theoretical maximum that could be raised if all retail investors took up their entitlement. You can argue this leads to dilution of retail investors as a class, but given these retail offers were not underwritten, it is defendable.

The DUET offer was over-subscribed by retail and the scale back only served to bring the retail raising back to the theoretical maximum of $45 million.

The Alumina scale back took us into new territory on Friday because the board chose to go from being slightly over-subscribed to substantially under-subscribed. After receiving $299 million in applications (5% above the theoretical retail maximum of $285 million), a $60 million scale back reduced the final retail raising to $239 million.

The retail component of the Alumina offer was not under-written – a vital point of difference with Bluescope. Given the Bluescope offer closed so strongly in the money on Friday, I suspect you'll end up being heavily over-subscribed. However, because your board has paid Credit Suisse to underwrite the entire $616 million retail offer, I don't see how you could follow the examples set by Wesfarmers, Onesteel, Fairfax and Alumina and impose a scale back to below the $616 million theoretical retail maximum.

After all, why reject applications from your existing shareholders and instead sell the heavily discounted shares to a Swiss bank which has already been paid more than $20 million for its services? However, even if you agree with the argument that the retail underwriting arrangement means you've committed to accept the full $616 million in applications if they are received, I suspect Bluescope has received substantially more than $616 million in retail applications. This would leave you with an important additional decision to make about the scale back.

Can I suggest you aim to accept $616 million worth of applications and that you adopt a minimum allocation of 10,000 shares worth $15,500. This would make it comparable to the new maximum level of $15,000 for share purchase plans. It would be lower than the $33,333 minimum adopted by Fairfax and the $36,000 adopted by Onesteel but higher than the $13,500 by Wesfarmers and the lack of any minimum adopted by DUET and Alumina. Such an approach would minimise the numbers of shareholders left disappointed but also contain the size of any windfall for small investors.

In terms of a multiple to entitlement approach, I have no issue with the current market standard of 3 times although that clearly would deliver a big windfall to your wealthier larger retail investors. For instance, your former managing director Kirby Adams, if he still owns the 2.58 million Bluescope Steel shares listed in the latest annual report, would be entitled to buy 10.32 million new shares for $16 million which, based on today's price, are already $10.32 million in the money.

There is no need to reply to this letter as I just wish to inform the directors of the situation and look forward to seeing the outcome of your deliberations. Whilst I'm not a Bluescope Steel shareholder, my wife is and she has applied for additional shares in the offer.

Yours Sincerely

Stephen Mayne