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What Does the Recent Private Placement in Lifebrandz Mean for Its Shareholders?

In my private placement series, I will be using some of the recent private placement deals happening in Singapore as case studies for investors to better understand how private placements done by companies can affect their existing shareholders.

This time, the focus is on Lifebrandz (SGX: L20), a lifestyle and entertainment management company that currently operates a few lifestyle food & beverage outlets in Singapore. Regular party-goers might also be familiar with its night-life offerings like Rebel, Mulligan’s, and Playhouse. While the night-life scene might be very exciting for some, the company’s corporate performance has been anything, but – it has struggled to make a profit since the financial year ended July 2009 when it posted a loss of S$11 million on revenues of S$30 million.

The placement deal

In Feb 2014, the company announced that it will be entering into a private placement agreement to improve its balance sheet. The company has since issued 425 million new shares at an issue price of S$0.0081 each for the deal. The issue price represents a 10% discount to the volume weighted average price of S$0.009 that the shares of the company had before the announcement. After the placement shares were issued, they now make up one-fifth of the total existing outstanding share count (some 2.135 billion) of the company.

The group of investors who were involved with the placement deal were led by Lifebrandz’s Director of Operations, Mr. Simon Tang. In this exercise, Lifebrandz managed to raise a total of S$3.385 million after deducting relevant expenses.

So, with some background of Lifebrandz and the deal given, is the private placement beneficial or damaging for existing shareholders of the company prior to the deal?

Current situation in Lifebrandz

Lifebrandz is currently a company with a tiny market capitalisation of just S$28 million. Due to its unimpressive results over the past few years, its shareholders equity (i.e. what’s left over after deducting all its liabilities from all its assets) has declined to only S$6 million.

A quick scan-through of the company’s latest quarterly financials shows that it does not really have valuable assets on its balance sheet. Most of the value of its property, plant and equipment are based on its renovation costs for its F&B outlets and that would not really be very valuable if the business fails. Yet, for a company with sub-par profitability and little hard assets on its balance sheet, it’s still a share that’s currently trading at 4.7 times its book value.

Shareholders of Lifebrandz should have been more than happy with the placement deal as it helped raise the company’s shareholders equity by more than 50% and provided it with much-needed cash for its operations. The real challenge here is whether Lifebrandz’s management has the capability to properly utilise the funds that were raised to ensure good profitability going forward. If management fails to turn the situation around, the company might need to continuously dip into the cookie jar and raise more funds just to sustain its operations.

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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.