Downer EDI retail investors spurn capital raising

Downer EDI CEO Grant Fenn. The company's $1.2b bid for Spotless hasn't won many fans.
Downer EDI CEO Grant Fenn. The company's $1.2b bid for Spotless hasn't won many fans. Janie Barrett

Downer EDI says it would take at least three months for it to complete a full-scale review of the Spotless Group business should it win out with a $1.2 billion takeover offer which has undermined its own share price and caused retail holders to spurn a capital raising.

The retail component of Downer's equity raising has proved to be a disaster, with just $5.2 million in applications received for a $254 million raising to help fund chief executive Grant Fenn's tilt at Spotless made on March 21 with a $1.15 per share cash offer.

There was no incentive for retail shareholders to take up the two-for-five entitlement because the shares have been trading at such a steep discount to the offer price of $5.95, meaning those wanting to top up their holdings were better off buying on the market.

Downer shares dropped 19¢ to $5.21 on Tuesday prior to the shortfall announcement made after the sharemarket closed. The stock is trading 32 per cent below a 12-month high of $7.62 hit in March.

Auction offload

Stockbroker UBS on Tuesday night began an auction to try to offload $250 million of Downer shares which hadn't been taken up by retail holders, however institutions have previously baulked at the fund raising to help pay for the takeover bid. 

Spotless revealed on April 12 that it was "advancing" talks on what it called a "potential superior proposal" and told its shareholders to take no action on the Downer bid, which was officially sent to Spotless shareholders on the same day. The Downer bidder's statement outlines that a broad-based review of Spotless and its assets was expected to take "at least three months" if it were successful and would include internal confidential information to which Downer "has not had access". Downer's decision to make the bid without asking for formal due diligence has been controversial.

Downer is in the box seat because it has already snared a 19.9 per cent stake in Spotless, making it difficult for any potential counter-bidders who would need to offer a more generous price.

The New York-based hedge fund Coltrane Asset Management is the second biggest shareholder in Spotless, with a stake of 10.37 per cent. The takeover offer will stay open until May 15 unless extended.

Prior to the retail offer Downer has raised $757 million in an institutional offer which was fully underwritten by UBS. The institutional portion of the equity raising occurred while Downer shares were still in a trading halt. But when they resumed trading the shares plummeted by 20 per cent because of apprehension by some investors that Downer may have been buying a business in decline and had made a big bet without careful due diligence.