Although McInerney Properties shareholders face a substantial dilution in their percentage holding - from 100 per cent to 4.5 per cent - if they agree to the restructuring proposals on Friday, they should say a firm Yes to the deal. They should go further and take up their full entitlement to new shares under the clawback arrangement.
Under the proposals shareholders will be asked to convert their existing shares on the basis of 18.57 new ordinary shares of 25p each which are being placed at 35p. This puts a value of 0.66p on the shares, so why are they being traded at well above this level?
This is partly explained by the clawback entitlement but mainly to a market perception that the new shares may start trading at above the 35p level. But is this justified?
There are two ways of looking at it. First, through the eyes of the existing shareholders. Second, through the eyes of the existing traders in the shares.
The existing shareholders have the right to subscribe for 68.2 million new shares for every 1,000 shares held. So each 1,000 block would entitle them to 87 new shares with a placing value of 35p each.
New or potential investors have seen the shares fall from 5p to 1.75p after the announcement on the restructuring. They have since risen to around 2.5p which seems too high. To put it simply, 1,000 shares at 2.5p would cost £25 and these shares would then be converted into 18.57 new 25p shares. This would entitle the investor to subscribe for 68.2 new shares at a total cost of £23.87. So the 87 new shares would end up costing 56.3p each!
Unless the new investors are buying the shares for tax reasons, they are, in effect, putting a premium of 19p on the new shares, or 54 per cent higher. The investors are also saying that the new investors in the restructuring, such as ICC Bank Venture Capital, will show a substantial capital gain (ICC would show a gain of £1.4 million on an investment of £2.5 million) on the first day's trading, that is unless they have over reacted and misread the figures.
One way of making a judgment on the existing market price and the proposed placing price is to look at prospective earnings. McInerney generated a pre tax profit of £305,000 in 1995 but that was after a charge of £450,000 from the redemption of loan stock, which disappears after the restructuring. It should be able to generate earnings of some £1 million by 1997 which would put the prospective p/e at around 8.8.
That is at a big discount to Abbey's prospective p/e of 13.7.
Abbey's shares should, of course, have a premium over McInerney's for two reasons - first it has had a good record, and unlike McInerney, has been paying dividends, and second, it has net cash while McInerney's gearing could be 100 per cent in 1997, albeit that will look good against the 240 per cent this year.
Still, the disparity between the two looks too high, particularly as McInerney could generate earnings of some £1.25 million in 1997.
Based on present expectations, the 35p placing price appears very much on the low side, so there should be scope for an upward movement, provided the shareholders and creditors agree to the restructuring on Friday. But investors who have purchased the shares at around 2.5p appear to be taking too rosy a view of the company.