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Can Private Placements Be Good For Existing Shareholders?

Lately, there have been a slew of announcements related to private placement deals that are proposed by a number of locally-listed companies with Ezion Holdings (SGX:5ME) being one of the most recent examples.

Private placements are deals in which a company would issue new shares of itself to investors (which can be individuals or corporations) at prices that are determined between both parties. Sometimes, this can result in extensive dilution of existing shareholders’ stakes in the company that’s issuing new shares. In light of that, it pays to take a look at private placement deals and over the next few weeks, I’ll be looking back at some of these to better understand the effects they might have on shareholders of the companies that are involved.

Case Study 1: JES International Holdings

JES International Holdings (SGX: EG0) is a shipbuilder based in the Jiangsu province of China. Earlier last month, it decided to raise additional funds through a private placement deal with a few private investors.

However, after the private placement was announced, the company’s auditor then revealed some concerns it had with the health of the company’s finances.

Basically, JES International Holdings had made huge losses totaling RMB522 million in 2013 and is in a negative current asset situation whereby its current liabilities exceed its current assets. The auditor also pointed out that the company had net operating cash outflows of RMB175 million in 2013 (i.e. the company’s spending more cash than it is earning on its daily business operations). As such, the auditor is not certain of the company’s ability to operate as a going concern. After the auditor’s announcement, the share price of JES International Holdings was slashed by almost half.

The company then renegotiated a new deal with the private investors. The finalised private placement would now see the company issuing 42 million new shares at S$0.14463 each (for comparison, the company had 1.166 billion shares outstanding prior to the placement). That’s actually a price that’s 83% higher than JES International Holdings’ last traded price of S$0.079 last Thursday.

What’s in it for existing shareholders?

With such a high premium attached to the shares of the private placement deal, the question to ask now is this: “Why would the private investors pay such a high price to buy into the company at a time when the company seems to be desperate for cash flow?”

If I am a potential investor looking to invest into a company that’s facing cash flow issues, the negotiating power should be on my side. But as it is, only one party from the group of private investors had pulled out from the initial private placement deal while the rest were ready to pay that high premium for JES International Holdings’ shares.

There are many issues currently being faced by JES International Holdings. Besides the auditor’s concerns and the halving of the company’s share price, there’s also the whole recession of the shipping industry in China to contend with. The latter situation might cause JES International Holdings’ assets to be sold at depressed prices if it has to go through a liquidation process in the event of bankruptcy.

With new investors seemingly willing to inject fresh equity into the company at a high price, existing shareholders of JES International Holdings might not have many reasons to protest about the deal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.