Prudential misses chance to reform rights issue fees
Prudential Plc (LON:PRU) had the chance to reform rights-issue underwriting fees with its £14bn share issue but has instead chosen to bribe big investors with their own expensive money. It is a missed opportunity.
Underwriters perform an important function in capital raising by guaranteeing that the company receives its cash even if existing investors decline to buy the new shares. Big investment banks are paid a fee for taking on the risk – but share the risk and the fee by recruiting an army of sub-underwriters who are institutional investors such as pension funds.
When rights issues offered new shares for about 80 per cent of the market price of existing equity the risk of investors not taking up their shares – not least because the market fell during the issue – was high. But increasingly companies issue shares at a much bigger discount, typically 40 per cent, so reducing the risk.
And for its 2-for-11 issue, Prudential is offering new shares at a mammoth 80 per cent discount to the pre-announcement price. At that price they ought to be snapped up even by reluctant investors and if the underwriters are left with equity, they should be able to sell it profitably without problem.
But instead of Prudential paying a reduced fee because of this reduced risk, it is paying 3.5 per cent of that massive sum, and to appease the sub-underwriters it has increased their slice of the fee from its original plans. They will now receive a 2 per cent fee instead of the scheduled 1.75 per cent.
And who are these sub-underwriters? They are Prudential’s existing large shareholders. They thus either subscribe for the new shares at 104p or are left having to buy them at the same price if the issue flops. But either way, they receive the fee. They are thus being paid to take up their own shares.
Prudential’s small investors are excluded from this cosy deal, however. They just pay the fee.
Underwriting fees used to be 2 per cent but the Competition Commission investigated the practice a decade ago and declared it a complex monopoly. However, instead of falling, fees have risen, despite deep-discounting reducing the risk. Prudential’s fee is at the top end of the rising scale even though its discount beats others.
The new Institutional Investor Council has now started its own inquiry into rights fees but while institutions should, as owners, be objecting to companies making unnecessary payments, as underwriters they are the recipients of those fees. If the council succeeds only in grabbing more of the investment banks’ fee for themselves it will have done nothing to help either the corporate sector or the private shareholder.
As a sub-underwriter itself on other companies’ rights issues, Prudential should have led the reform but when the chance came it chose not to take it.
