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Has New World Oil & Gas made a catastrophic error in its open offer?

By Ben Turney | Tuesday 16 June 2015


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


By Friday afternoon it looked like New World Oil & Gas’ (NEW) board and its hapless regulated advisors had made yet another catastrophic error. Even by this group’s sheer rank incompetence over the last seven weeks, the latest blunder could be the worst. Not content to forward sell an unconfirmed placement, trample over shareholders’ lawful rights, ignore market rules, waste the company’s dwindling cash on an unjustifiable battle to save its advisors to the detriment of shareholders and try to force through an abysmally mispriced open offer, New World and its grossly inept advisors appear now to have broken the law.

According to Section 85 of The Financial Services and Markets Act 2000 it is unlawful in the UK to make an offer of transferable securities to the public, unless an approved prospectus has been made available, when one is required. Under the European Prospectus Directive, any offer of transferable securities that yields a consideration more than €5million requires the publication of an approved prospectus.

In its circular, New World’s board claimed:

Given the uncertainty as to the full extent of the settlement problems in the Ordinary Shares and the Company’s desire to raise a meaningful amount of money to advance its plans, the Board has resolved to make the Open Offer as large as it can without the need for publishing a prospectus, which the Board consider would be impractical in the circumstances.”

Oops…

By its own admission, New World only has £290,000, having wasted over £300,000 defending the indefensible since the start of May. Having consulted with a number of AIM participants, the general consensus is that it costs about £250,000 to produce a prospectus. It is no wonder New World’s board felt it “impractical” to publish one.

New World calculated the size of its open offer on the basis of the 702,723,713 shares it has in issue. Its plan was to raise £3.5million (€4.84million) through issuing 3,888,873,028 shares on a 5.534 to 1 basis. This would have kept the total value of the open offer a hair’s breadth below the €5million prospectus threshold.

Then along came the London Stock Exchange.

Within a few hours of New World’s announcement of its open offer, the LSE issued Notice N11/15.

In simple terms Notice N11/15 declared that all trades after April 29th, when the forward selling fiasco began, were “cum” (Latin for “with”) entitlement to participate in the open offer. The LSE decreed that all holders of New World stock, who were entitled to participate in the open offer, would receive credits to their CREST accounts on Friday June 12. Towards the close of play on Friday it was clear the LSE has been true to its word and issued credits to entitled holders. Crucially this included holders of unsettled New World stock.

I cannot stress enough how important this last point is.

By acknowledging and acting upon the entitlement of holders of unsettled New World stock, at a stroke, the LSE dramatically increased the size of New World’s open offer. If we use my conservative calculation that there are currently 460.8million unsettled shares in New World, then this makes the total consideration of New World’s open offer worth €8,000,000, based on the 1.16billion shares entitled to participate (700milllion shares in issues + 460million unsettled shares * 5.53 entitlements * 0.09p price *€1.38 conversion rate).

Of course, the true value of New World’s open offer is now probably much higher. After all, New World’s board announced that its planned issue of 3.89billion shares was designed to resolve the “settlement issues” currently facing the company’s stock. Why issue so many shares if the naked shorters didn’t need them?

With this in mind, it is not beyond the realms of fantasy that the naked short position in New World’s stock is as high as 3.89billion shares. As utterly absurd as this is going to sound, this would make New World’s open offer worth €31,559,091.

Just to emphasise the point, holders of unsettled New World shares have already had their CREST accounts credited with their entitlements to participate in New World’s open offer. This must mean that the current value of New World’s open offer is now somewhere between €8million and €31.56million, well over the €5million threshold requirement for the publication of a prospectus.

And just to remind you, it is unlawful to make an offer of transferable securities to the public in the United Kingdom, worth more than €5million, without publishing a prospectus.

Given that New World’s board has made this offer to the public, any hope that it or its advisors might have of shutting the stable door are dashed. The horse has already bolted and the stable is on fire.

 

If you are a member of the public in the United Kingdom who has been affected by this story and has received an offer of shares without an accompanying approved prospectus (when one was required), please call the FCA’s consumer helpline on 0800 111 6768, to share your concerns and seek advice, while there is still time.


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Comments

5 comments

  1. Haha… honestly couldn’t make this stuff up.. buch of incompetent ***** .. I really hope bulls take the twa*s to the cleaners!!!

  2. my understanding was that in the event of a share offer – any additional entitlements relating to unsettled long positions created by naked shorts will be ‘made good’ by the shorts via the claim process – as referred to by the LSE in their notice. In effect the shorts go further short by an amount equivalent to the excess long entitlements. The existence of naked shorts and unsettled trades will have no impact on the number of new shares in the Offer. Nor will the company receive any more than the intended offer amount. Either my understanding is incorrect – which is quite possible, OR the Author’s understanding is incorrect, OR the article is meant to mislead. I would be interested in the authors response.


  3. Ben Turney

    @hmmmm – Let’s say for a moment that your understanding is correct, what you haven’t addressed is the total amount of money being asked for from the public for transferable securities, as a result of the open offer, well exceeds the €5million prospectus threshold. At the very least New World needs to rewrite its paperwork to reflect that. As things stand how on earth is the public meant to be able to put a total value on what is being asked for or to understand what they are signing up for?

    I would love to see an official explanation to an average shareholder.. well, sir/madam, you have bought stock but that is unsettled. You are entitled to make a claim on this open offer, but your money will not go to the company, instead it will go to the counter party that previously sold you stock and failed to deliver it. You will then receive your new shares from the same counter party who failed to deliver stock last time…

    It is an absurd situation.

    Another major point to consider is the incredible confusion among the retail brokers as to who owns settled and unsettled shares. This further muddies the waters as to who might genuinely participate in the open offer (according to your logic).

    As for your interpretation, please give it some more colour, quoting the exact parts, which you feel support your argument. I don’t agree with it.

  4. Ben how can New World be responsible for the open positions. They can only control what has been issued. They will only receive what they issue. This is a balls up from the start and greed as always has taken over. How much New World were involved in this only a few people will know. How Cornhill will come out of this is anyones guess but I would assume the FCA are doing a thorough investigation. Just like Room Service. Be interesting to see who the naked shorts are. Is it just the likes of Winterfloods? If not surely they should be disclosed.


  5. J P Spaghetti

    “The horse has already bolted and the stable is on fire.”

    The horse boarded the starship Enterprise just before it hit warp 8 and the stables were engulfed by a supernova. What a calamity!


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