Resolution investors pay for their own low-cost rights issue
The £2bn rights issue by Resolution Limited (LON:RSL) cuts the cost of the capital raising – but only by transferring much of the risk onto the life assurance company’s existing owners. It is not as revolutionary as the commentators say: instead of protecting investors from the risk of a flop, it is existing shareholders undertaking the underwriting.
Companies want rights issues underwritten because it guarantees they receive their new capital – whether for filling holes in the balance sheets or, as in Resolution’s case, to finance an acquisition. City investment banks provide the guarantee for a fee and offset the risk with sub-underwriters – institutions such as pension funds that, also for a fee, agree to buy the shares if existing investors decline them.
Companies cannot afford to not to raise their cash – possibly because the stock market falls between the announcement and decision day. But investment banks are in business to take risks and the pensions funds are risking only a small part of their value.
But the costs of rights issues have risen from about 2.75 per cent of the proceeds a decade ago to 3.5 to 4 per cent. And the risk has diminished because instead of offering new shares at 20 per cent below the market price, deep discounts of 40 or more per cent are now usual. Resolution is among companies seeking ways to cut the costs and has a strong enough reputation to rewrite the rules.
The Monopolies Commission concluded a decade ago that underwriting was a complex monopoly but it failed to force rates down. The Office of Fair Trading is now looking again at the cost, with the institutions’ own shareholders’ committee holding its own inquiry. Investment banks thus have good reason to show they can be flexible.
But Resolution’s remedy is to remove the investment banks’ risk for just over half the issue by engaging its own shareholders as sub-underwriters. That cuts the banks’ fee to 0.97 per cent and gives the usual 1.75 per cent to the sub-underwriters.
But it leaves the risk with the life company’s existing investors. If they fail to subscribe to the issue as shareholders, they get lumbered with it as underwriters. The price for taking on that risk is the 1.75 per cent, but in reality, that percentage is simply a further discount on the price the shares are sold at.
This self-underwriting solves Resolution’s problem - it receives its £2bn for less cost – but it does nothing to help the institutional investors who have no choice other than to inject the capital. Private investors are excluded from this arrangement, of course – but while they will pay more for their shares, they have the option of rejecting them.
July 21st, 2010 at 9:03 pm
Very hard for ordinary smaller shareholders to know what to do for the best
July 23rd, 2010 at 10:41 am
Having already suffered a significant loss on my Friends Provident shares I am not anxious to lose more. However I am not an expert and would be grateful for others’ views as to whether on balance it is worth taking up all or part of the Rights Issue.
July 23rd, 2010 at 12:15 pm
I have no idea what to do ! can anyone give me a simple description of what is going on. I have 300 shares
July 23rd, 2010 at 3:09 pm
I am not a financial wizz kid but this strikes me as some kind of con trick and should be investigated by the FSA or some competent authority.
I had 1954 RSL shares worth in June 2010 about 80p per share ie total stock value £1563.
I have now been given 65 “new” RSL shares for y old 1954 shares and these “new” shares are trading at 233p per share ie total stock value £151 and I have been given the option of Rights Issue of 1107 shares for which I have to pay £1660.50. At a stroke I have lost £1412 and asked to cough up £1660.50
July 23rd, 2010 at 4:06 pm
Its not a con trick, its more regulated blackmail. Essentially, cough up on the rights issue and hope that the ordinary new share price does not drift down too far to allow you to recover some of your paper losses. Wait and hope that the Resolution can produce the goods and hope that dividends reflect the risk that shareholders are taking by underwriting this acquisition and that the share price recovers sufficiently to put you back in the black.
Do nothing or exercise your cashless take up and you will have effectively lost most of your investment as the new consolidated ordinary share is worth but a fraction of your earlier resolution share holding.
Bit like that bus in the Michael Cain film classic. Will it topple over the edge or will it teeter on the brink for a while?
July 23rd, 2010 at 4:58 pm
I feel like I’m being fleeced, ripped off or worse. Lost cash with Friends Provident and it now looks like another mugging by Resolution. Should I stay or should I go, mmm, it is a more than just a gamble as I feel that the odds are so stacked against me that I will never ever regain my initial stake in this debacle!!!
July 24th, 2010 at 12:55 pm
Don’t throw good money after bad. Resolution is lead by predatory spiv’s although they do make one point that the cost of mounting a Rights Issues could be lessened; some in the city seem to think this is enough to applaud Mr Cowdery. I was never happy to see many a UK blue chip life-pension mutual be de-mutualised, nor did I ever believe RBS had anything to offer NatWest. Resolution have nothing to offer FP or AXA, nor the pensions and life market, nor their customers. Take a look online at the 339 page prospectus for the purchase of French AXA’s UK life business only (your money will pay for this) and you see all the usual jargon of synergies and out-sourcing. There is a warning that cost cutting may cost more than expected – yes, lost customers. No talk about better products and better service to retain and attract customers. Any fool can slash and burn.
For most small investor it has been very difficult to understand what’s going on and what to do, the bottom line is that they want to know what will they end up with and what has it all cost? The mini Rights Issue Guide fails on this point for obvious reasons, they are trying to hide the fact that your initial investment in RSL is almost valueless. If you had 180 old pre-rights RSL shares (old value about 180×70p = £126, now consolidated to 6 shares x234p = £14 at close of trading 23.7.2010) and take up the 102 rights you end up with 108 new shares all the same value and type trading at 234p. Hopefully I have got this right. Your cost will be £153 for the new 102 rights shares plus £112 lost value due to consolidation of the original 180 shares. I CAN WELL AFFORD THE ISSUE – BUT NEVER WILL I SUBSIDISE RESOLUTION AND THE UGLY FACE OF CAPITALISM.
July 26th, 2010 at 12:11 pm
This is an absolute disgrace. Basically all of the smaller shareholdings who can ill afford to the rights issue are funding Cowdery’s expansion plans. All of us (ex) employees who took pride in working for FP, took an interest in their progression and remained loyal throughout the last couple of years, are now being ripped off.
What can we do about it?
July 26th, 2010 at 12:44 pm
I have owned 4500 FP/Resolution shares since the company was privatised ,and for which I effectively paid about £8500. The shares have never done particularly well, but I have always lived in hopes. I viewed the takeover by Resolution with some trepidation but the shares were so low then, I stuck with them thinking they could not go much lower. The very recent AXA deal has left me shell shocked and totally bewildered. I probably know as much about share dealing as Mr Average but am not clueless.
Following agreement at the Resolution General Meeting on 20/7/10, On 21/7/10, I accessed my shareholding portfolio through Computershare, Resolutions shareholder services provider. My shareholding in Resolution was shown as 4273 (the number of shares I had been allocated when Resolution took over FP) and the value of each share was shown at £2.45.
I immediately accessed the Computershare, on line share dealing service, in order to sell my shares but was unable to make a deal until after the market had closed. However I did make a deal to sell my entire holding. I did not tell Computershare how many shares I held, it was telling me. I have a deal confirmation notice with a Deal Reference Number which tells me (a) the company I am dealing in - Resolution ORD NPV; (b) The number of shares being sold - 4273 (c) the number of shareholding before - 4273 (d) the number of shareholding after - Nil.
On 22/7/10 I rang the shareholder hotline at Computershare to establish the rate at which my deal was done and was advised at 245.3 and that I would receive £10436.97 after commission. On 23/7/10 I recieved a telephone call to say that the deal I made was invalid he said that after the consolidation I only had 142 shares each valued at 245.3 giving an overall value of £348.
If what he says about the consolidation is true then the value of my portfolio would have reduced overnight from about £2970 to £348 and I am to say the least staggered and do not understand what is going on. I may have missed something along the way. I did read the prospectus for the General Meeting. But gained no inkling of what the company was intending . Given that, they have never sought to be user friendly as far individual shareholders are concerned.
I have 2 questions which I hope someone may be able to help me with.
Was the deal I made valid?
What has happened to my shares?. If I am now the owner of just 142 shares valued at £348 then this must be a blatant case of highway robbery. The share price would have to increase from 245p to 2091.5p just to restore the value 3 days ago.As I understand it there is no current value to the rights issue as I am not able to sell them now. I can elect to sell them but the value I will recieve will be determined by the price they can be sold for which Resolution confirm could leave me recieving nothing for the reserved rights.
A very angry and bewildered shaereholder
July 26th, 2010 at 2:05 pm
Bill C
The number of shares you have been allocated in the rights issue will be sold on your behalf if you do not exercise your right to buy. The amount you will receive will be determined by the share price at the time of the rights issue in a couple of weeks, less the option price. So currently they are worth around 226p, less 150p option price = 76p. Do the maths and you are well out of pocket, (to the tune of a couple of grand) as am I and many other smaller shareholdings.
What I want to know is how this can happen.
In financial services we have a thing called TCF, treating the customer fairly. This is clearly not how we have been treated.
It would appear that Resolution are just a bunch of spivs and con men.
July 26th, 2010 at 4:00 pm
Hello Bill & Martin,
I’m afraid it’s the free market, or the ugly face of capitalism – take a look at my previous entry. I kept my FP shares out of sentient and then last year when RSL bought FP I kept them just to see what a hash up RSL would make of the takeover, never believing in RSL. Holding on to a few shares forces them to keep in touch, I’d written the value off long ago; too lazy to sell just after demutualisation (usually the best time, also for cashing in Gov’ sell-offs).
I researched: RSL’s background, the prospectus for the takeover of a UK section of AXA (not all AXA), Mr Clive Cowdery’s background and education, his achievements, and even talked to FP staff, Judging how little my criticisms have been moderated on various blogs there must be others in the financial sector with strong reservations about Resolution. In life one has to know when to cut and run.
July 26th, 2010 at 4:11 pm
Hello Stevie
Thanks for your comments. I’m not exactly an expert but neither am I ignorant to the way the markets work, but the way this has come about has been an absolute shock….blackmail even!
I won’t be throwing good money after bad and will be a little more choosy in future.
Hard lesson to learn….
July 28th, 2010 at 2:52 pm
Hi,
I have looked at a number of blogs and it would appear that I, like many of you, have been mugged by this deal with no way out other than to take the loss/es (including FP) on the chin. However, if I put more money in does anyone out there believe the shares will be worth more in the future? If this is being recommended for the big boys as a possible winner over the medium to longer term, why not the smaller investor?
Yes we have been commercially raped but is there a possible upside to this?
July 31st, 2010 at 4:43 pm
Hi everyone,
Like you I am appalled at the treatment of the small investor - I had 2350 Friends Provident Shares (some free shares) purchased at £2.135, reduced to 2115 (90%) by Resolution. Never in my wildest dreams did I think they could be further reduced to 70 (30:1) conversion at current date £2.38 per share - value £166.60.
Can we report this to the office of Fair Trading? It does not seem right to be treated like this. I will not be puting any more money into Resolution for fear of losing even more of my hard earned cash. The Telegraph Article 26/10/2010 if you do a search on google says it all “It is only for the weathly small investor” and you will be asked for more money to fund their next aquisition later down the line.
August 6th, 2010 at 9:35 am
I completely agree with what has been said, however with the view that there’s not really too much I can do about it I’ve taken the cashless option. Hopefully that should give me roughtly the value my 400 odd shares were worth prior to consolodation, but I’m not holding my breath.
August 6th, 2010 at 11:04 am
I run a financial adviser firm:
You might have lost money but we are living in a catastrophic bear market that is really in its eleventh year.
Look at the wood, not the trees: Resolution is a consolidator of life office businesses that are reducing at 20% per annum. Give Resolution time and they will be completely dominant in the sector and you the shareholder could make serious money from that monopoly situation. The life offices are generally very poorly run - that takeover is a great move.
October 8th, 2010 at 12:59 pm
Was hoping my original FP shareholding would pay for my funeral. Then robbed of a nice coffin by Resolution. Doubt now if my shareholding will pay for a candle at my wake.
November 4th, 2010 at 5:24 pm
I’ve just phoned the Computershare helpline and found out that my shareholding with Resolution which was worth £331 in July is now worth just £40! Nothing to do with the stock market value changing…just due to the share consolidation! This seems outrageous and even fraudulent! Please can anyone give me some advice on who to complain to about this? Is it possible to complain to the Financial Services Authority? I’ve tried complaining to Computershare but I think they are just the brokers and therefore aren’t liable.
A very frustrating situation! I’m glad I didn’t have a higher shareholding!!!
Any advice appreciated.