Baker Steel Resources Trust open offer - confused

I have shares in Baker Steel Resources Trust and I've just had a message via my platform inviting me to purchase shares as part of their open offer. It says that I have entitlement of 3.65 Subscription Shares for every share I currently hold, and that I may exercise each Subscription Share in exchange for one new ordinary share at a cost of 38.2 pence per share.

OK, I think I understand it so far -- they're issuing new shares and offering me the chance to buy some. However the bit I don't understand is that the shares are currently trading at about 29p -- why would I (or anyone else) pay 30% more than that in this offer when we could just buy them in the open market instead?

I realise that there's probably something really obvious that I'm missing so I'm a bit embarrassed about having to ask, but I'd be very grateful for an explanation.

Replies

  • jimjamesjimjames Forumite
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    Simple answer, you wouldn't.

    I'd imagine they have to offer the opportunity at specific points and it may not be worth doing sometimes if the price is lower to buy directly.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • Thanks for the reply.

    Who is buying these shares then, and at what price? I'm confused....
  • edited 1 February 2015 at 9:06PM
    bowlhead99bowlhead99 Forumite
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    edited 1 February 2015 at 9:06PM
    You are right, you could go out tomorrow and just buy a few thousand pounds of shares for 30p a share. But they are not going to be able to raise the significant amount of money that they need from retail investors such as the likes of you. The market cap of the company (shares in issue times the current low share price) is something like £20m so you can be sure that if an institutional investor went to buy £10m of shares in the market he wouldn't find them available at 30p.

    The trust at its current value is small and inefficient to run. They need / want to spend £20-100m buying new assets (in new and existing investee companies, some of which are already owned by affiliates of the manager).

    So the amount they are looking to raise is a massive amount more than every investor doubling their current invested amount.

    As a sweetener to get people to invest, they are offering shares at a discount to NAV, but not at a discount to the current share price which in itself is at a larger discount to the NAV.

    Unaudited NAV at December was 45p. So they are allowing investors to buy new shares direct from them (raising money for the company) rather than buying shares on the market (which does not raise money for the company) at 38p, a 15% discount to the value of the assets. It is more that you'd have to pay on the open market but the published market price on the open market is only for trades within 'normal market size' ; the NMS for this trust is 7500 shares so only a couple of thousand pounds worth of shares.

    You may find the share price goes up quite sharply if the fundraising is a success as they will be on solid foundations and the running costs will be less (per share) per year. Of course, if their strategy is to pile more money into existing and similar investees (even in some cases at a discount if they buy depressed shares off their loss-making affiliates) you are still taking a punt on how good they will be at identifying the companies that will come good and have been oversold in the great crunch period for small natural resources companies with the price of energy (e.g. coal, oil and gas) and a variety of other commodities much lower than in previous years.

    The companies and partnerships in which they are currently invested have not produced great results over the last year. So, investing more money into placings of existing companies to prop them up, or buying out their own affiliates who are losing money hand over fist, or investing opportunistically in 'more of the same', may or may not be something that works out, depending on the choices they make. If you think they will come good, someone with your size of investment can probably keep your existing shares and buy as many more as you want on-market for under 38p. For bigger investors, they couldn't. If no bigger investors are attracted by the idea of investing at 38p then it doesn't bode well for the trust as a going concern.

    Good luck!
  • dealer_winsdealer_wins
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    What a great reply by bowlhead99.
  • alexanderalexanderalexanderalexander Forumite
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    bowlhead99, thank you -- that's very helpful.
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