By Nigel Somerville, The Deputy Sheriff of AIM | Thursday 9 July 2015
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
New World Oil and Gas (NEW) has been explicit with its warnings that the plan to conduct a Placing and Open Offer is not guaranteed to solve the settlement crisis, which saw the London Stock Exchange belatedly step in and suspend trading. Tuesday night’s RNS (after hours, natch) with the results of the offer continued to warn that it may still not result in the lifting of the suspension. Let us have a look at the numbers.
On Tuesday night we learned that out of 3.89billion shares being issued, 0.58billion were being taken up by Eligible Shareholders (later defined as ones whose holdings appear on the shareholder register), and that the remaining 3.31billion would be placed out. The LSE had previously ruled that unsettled holders may also apply for offer shares, yet New World did not mention unsettled holders at all. It seems unlikely that none of the unsettled holders applied for offer shares, and therefore one might conclude that their entitlements will have to be met by the seller (but thus far non-supplier) of stock to them. One would therefore conclude that those shares would have to come from the placing stock in some manner.
0.58billion offer shares being issued means that holders of approx. 0.1bn shares applied for their entitlement. With approx. 700million shares currently (legitimately) existing, that is a take-up rate of about one in seven. The question is whether there will be enough stock from the placing available to cover the unsettled trades – and their entitlements.
If we were to assume that the take-up amongst unsettled holders was of a similar rate to the settled holders then for every 100 unsettled shares, there would now be around 178 shares needed to settle outstanding trades (original 100 plus 100/7 x 5.5 new offer shares). Given that we know 3.31billion placing shares are about to flood the system, if we divide that number by 1.78, that gives us an idea of how big the naked short position can be before the placing shares are still not enough to clear the backlog. That number comes in at 1.86bn.
This all assumes, of course, that settled and unsettled holders applied in similar ratios for offer shares. However, there are other variables, such as whether a previously very large holding may have passed on the offer altogether. That could skew things to a sharply lower threshold.
The original (but aborted) Placing was for 2.7billion shares which, it is conceivable, could have been naked sold into the market. If two thirds or more of these un-issued shares are currently awaiting settlement then it just could be that this Alice-in-Wonderland vs the Keystone Kops farce still has a few twists and turns to come.
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