Independent shareholders should vote against the open offer at the SGM on Thursday 4-Jun-09, and protect themsleves from 400% dilution.

Comment: RBI Holdings open offer
29 May 2009

Loss-making toymaker RBI Holdings Ltd (RBI, 0566) is proposing an open offer of 4 new shares for every share held, at $0.10 per share, to raise HK$63.6m gross ($61.0m net) for "general working capital purposes and future business development". The offer is underwritten by Kingston Securities Ltd, who could theoretically end up with 80% of RBI, but they have undertaken not to go above 30% and that nobody else will get 10% or more.

The offer is at an 86.1% discount to the market price of $0.72 before the offer was announced on 27-Apr-09. After that, the share price took off, climbing 225% to close at $2.34 on 27-May-09 before going ex-entitlement this morning. Is the stock being ramped or is there some inside information leaking?

Unlike a rights issue, the entitlements to the open offer are not renounceable. So shareholders cannot sell the entitlements in the market. That's why London Listing Rule 9.5.10 limits the discount on open offers to 10%, to protect shareholders from the loss of value through the discount if they do not take up their entitlement. Hong Kong has no such limit. Shareholders have a gun to their heads - either take up their entitlements or get diluted by 400% at a massive discount. Nor can they apply for the entitlements not taken up by others - that benefit goes to the underwriter.

There is no clear justification for issuing equity anyway. At 31-Dec-08, the company had cash of $51.8m and no borrowings. Since then, it has conditionally sold its Shenzhen property for RMB63.8m (HK$72.4m), with completion due on 29-Jun-09.

But shareholders do have one chance to prevent this open offer - vote against the offer at the Special General Meeting on 4-Jun-09. The controlling shareholder, Mr Tsui Ming (via Lucky Tune Ltd), is not permitted to vote his 40.21% stake. A simple majority of independent shares voted will stop this offer.

Bizarrely, SEHK has allowed the stock to begin trading without entitlements to the Open Offer even before shareholders have approved it. The Stock Exchange should not allow such timing. All trading in such situations should be "cum entitlement" until any necessary shareholder approvals have been obtained, otherwise it risks disorderly markets. If the offer is rejected at the SGM, then the dilution effect will be removed and (all other things being equal) the price would rise back to where it started. However, as noted above, we think the stock price may be artificially high.

At lunchtime today the stock closed at $0.84 ex-entitlements, which values the enlarged company at HK$667m, more than 1.5 times its pro forma net asset value of $0.558 per share as set out in the open offer circular of 19-May-09. Incidentally, the man who signed the fairness opinion on the open offer on behalf of Guandong Securities Limited, Graham Lam Ka Wai, was until 28-Sep-06 a Responsible Officer of Kingston Corporate Finance Ltd, in the same group as the underwriter in this transaction. He serves as an independent director of 7 HK-listed companies.

Time is short - CCASS will cut off voting  on Wednesday 3-Jun-09 at 4.15pm. You need to instruct your broker, bank or custodian well before that. If you are a registered shareholder (holding a certificate) then your proxy form must arrive by 9am on Tuesday 2-Jun-09, or you can vote in person. Vote against the open offer.

©, 2009

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