C[omp]ute

From: andrew cooke <andrew@...>

Date: Sun, 12 Aug 2012 10:59:42 -0400

There's been a lot of news in the Chilean press recently about Enersis.  The
bare facts are here -
http://www.ft.com/intl/cms/s/0/e6867bf8-d727-11e1-8e7d-00144feabdc0.html - but
there's no explanation of why there has been such a big fuss.

There's a bit more background at
http://blogs.ft.com/beyond-brics/2012/07/26/chile-enersiss-8bn-cash-call


To understand what's happening you need to understand what a rights issue is.

So pretend that I am a company worth a billion dollars.  I am a publicly
traded company with just 1 share (also worth a billion dollars) that you own.

And I want some money.  Maybe I want that money because I want to invest and
grow.  Or maybe I want it because I am in desperate financial trouble back in
Europe.

Either way, I decide to create a second share.  I offer this share to you for
another billion dollars.  Why would you buy it?  At first glance it seems like
an odd/crazy thing to do - you already own all the company.  Why would you pay
to buy it again?

But if you buy the share I will have a billion dollars in extra cash.  So I
will no longer be worth one billion dollars (assuming my previous value was
fair) - I will be worth two billion!  So you will have paid 2 billion for a
company that is worth 2 billion.  So you don't lose anything!  Assuming that
the shares are liquid (that you can easily find a buyer) you could sell one of
those shares and get your money back.

Meanwhile, I am going to be busy investing that money, making my company
better.  Which will make my value increase further.  Which will make you
richer (since the value of the shares will increase).  Profit!


That took me a while to get my head around.  But in summary it's a way for a
company to raise money from its shareholders so that it can grow while
providing some guarantees that the profits from that growth go back to the
people that provided the money.

And if everyone is happy with the numbers then it makes a lot of sense.
Because it doesn't really "cost" the investors anything - in return for their
money they get an equal value in shares.

But there are risks.  What if the company doesn't grow?  What if it wastes all
that cash?  What if the current value of the company isn't a fair reflection
of what it is worth?  What if the company is going to use that money to pay
debts it's been keeping secret?

The Chilean economy is in pretty good shape.  Europe (especially Italy and
Spain, where the parent company of Enersis trases - the one that is making
this offer) is in a mess.

As the FT notes in the second link above:

  The problem is that the valuation given to the assets looks rich – some 25
  per cent more than Barclays had estimated, Invernizzi said in her note. And
  shareholders have little power to stop the deal from going through as
  proposed. The capital increase plan only needs two thirds of the votes to
  pass; Endesa already has 60 per cent of them.

So the company was going to push through a deal that would hurt Chilean
stakeholders (particularly the large pension funds, particularly mine - and
they sent me and everyone else an email about this just last week).

So all hell broke lose.

Andrew