Mulling over the AT deal

In my column last week, I suggested that while the market had long been on an obvious bearish path owing to stubborn global and local risk factors, there were mute but marked signs pointing to the presence of market bulls that could lend to a bullish market sooner or later.

This can be seen in their quiet but growing number of big block sales executed recently along with their M&A (mergers and acquisitions) activities that continue to grow despite reports on the decline and projected further deceleration of corporate earnings this year.

Atlas deal structure

One of the stocks that became the subject of such market attention and activity—and driving up its market price to an almost vertical climb last week—was Atlas Consolidated Mining and Development Corp. (AT).

Attendant to this, AT’s management requested for voluntary trading suspension that started last Friday (June 24) and ended Monday.

All this was because of the intent of AT to increase its ownership interest in subsidiary company Carmen Copper Corp. (CCC) from 54.46 percent to 100 percent through the acquisition of the equity interests of its partner CASOP Atlas Corp. and CASOP Atlas BV totaling 45.54 percent for $368 million.

Through the financial advisory services of Evercore Partners and BDO Capital and Investment Corp., AT will raise $390 million to finance the acquisition and at the same time provide general working capital requirements of CCC through the “issuance of a combination of debt and equity securities.”

This entails the issuance to “target investors” of 700,536,809 of AT shares at P19.56 each, representing an 8.5-percent premium over the 30-day weighted average price of P18.03, which will result also in an approximately 33-percent dilution to present stockholders’ interest in the company.

In this connection, (a) BDO Capital is to underwrite the private placement of 316,242,331 shares at P19.56 each for a total of $142.2 million based on the exchange rate of $1 to P43.50; (b) the issuance of a five-year convertible note to publicly listed Banco de Oro Unibank amounting to $75 million with the following “essential terms”: (i) interest rate of 7 percent a year; (ii) one-year grace period for the payment of the monthly amortization on the principal amount; (iii) repayment of principal to be made in equal monthly amortization over four years; (iv) the note may be converted into AT shares only in the event of default and (v) to be secured by a guarantee to be provided by CCC; (c) the issuance of a one-year note to BDO with the face amount of $122.8 million and convertible into 273,098,159 AT shares at P19.56 each based on the exchange rate of $1 to P43.50; and (d) the issuance of 111,196,319 AT shares to Alakor Corp. at P19.56 each or an aggregate price of $50 million at the exchange rate of $1 to P43.50.

Bottom-line spin

Based on the strict professional viewpoint of AT’s financial advisors like Evercore Partners’ adviser-representative Stephen “Stevie” Cuunjieng, the deal is a cut-and-dried efficient scheme. It does not only raise the needed amount of money but also assures the timely payment of the 100-percent ownership interest in CCC and at the same time provide extra funds for general working capital requirements that will keep the present operating level of the company.

The scheme will dilute present stockholders’ interest up to not more than 33 percent. For such a sacrifice, present stockholders will enjoy AT’s instant fortune to realize increased revenue and earnings up to the extent of 84 percent without any change in the operating level and efficiency of CCC.

But this is not so, in the eyes of die-hard AT stockholders as shared by investor Rachel Ang of Cebu. It strikes some resemblance to insider trading and market manipulation tales on Wall Street that she had learned from her starting-out reads on financial investments. The scheme does not prioritize present—albeit minority—stockholders to enjoy increased ownership interest as well as protect them from dilution.

Along with her family and friends in Cebu who have always believed in the prudence and sense of generosity of AT’s moving spirit and top honcho Fred Ramos, “present stockholders should be given the first chance to be tapped as source of funds before the so-called ’target investors’ [with the exception of Mr. Ramos’ Alakor company, which is a party to the deal],” Ms. Ang said.

This was her sad lament upon learning of the details of the “capital raising” plan. However, this was overtaken by circular no. 4749-2011 issued by the Regulation Division of the bourse after the disclosure of the scheme on June 24.

Accordingly, the transactions disclosed are subject to Section 1 of the “Rule on Additional Listing of Securities,” which provides that “transactions resulting into issuance by a listed company (Issuer) of new voting shares to any party or to any persons acting in concert (Subscribers) amounting to at least 10 percent but not more than 35 percent of the total issued and outstanding capital stock of the issuer through a creeping total issued and outstanding capital stock of the issuer through a single or creeping transactions within a period of 12 months from the initial disclosure. Such transactions may include private placements, share swaps, property-for-share swaps, or conversion of securities into equity.”

The best part of the circular was on the statement that “as a general rule, the Exchange shall not permit the listing of shares subscribed by related parties unless a rights or public offering is first undertaken.”

That will certainly take care of the fear and/or frustration expressed by Ms. Ang. By the rule’s provisions, she will have her chance to increase her stockholdings, much less be diminished.

But old hands in the bourse like Ms. Ang’s father has some cynical feelings about the matter. These tough provisions challenging the proposed financial scheme for AT will—ultimately—be rendered futile considering the track record of the bourse of extending “exemptions to the rule” in the past. Somehow, some reason is always found to grant exemption.

Feeble as it is, this reaction of minority stockholders to the financial scheme put forward for AT may drive its market price in reverse.

You may not have to wait long for the answer, though, to this issue. The voluntary trading suspension of AT shares will be lifted Tuesday.

You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.