Golden Agri-Resources launches $218 million rights issue

Warrants with a three-year maturity could increase the total deal size to $480 million.

Singapore-listed Golden Agri-Resources (GAR), owner of the world's second largest palm oil plantation, has launched a renounceable rights issue that is expected to raise approximately S$317 million ($218 million). Shareholders that subscribe to the deal will also receive warrants, which, if fully exercised, could increase the total value of the issuance to $480 million.

The rights issue consists of 1.7 billion new shares, which will be sold at S$0.18 apiece, a 60% discount to the closing price on Tuesday, the last day of trading before the deal was announced. Shareholders will be entitled to 17 rights shares for every 100 shares owned.

The rights shares come at a 56.2% discount to the theoretical ex-rights price (Terp). This is significantly wider than that of other rights offerings in Asia this year, which have offered discounts to Terp of up to 35%. Among the deals currently in the market, Singaporean property developer Keppel Land is looking to raise up to $478 million from a rights issue priced at a 27.6% discount to Terp. Earlier this week Hong Kong-listed Pacific Andes International Holdings (PAIH) said it will tap its shareholders for $73 million at a 30.2% discount to Terp, while its Singapore-listed subsidiary Pacific Andes Holdings is aiming to raise $143 million from a rights issue priced at a 34.2% discount.

On the GAR transaction, for every five rights shares subscribed to, shareholders will receive two detachable warrants. These will have a three-year maturity and can be exercised at maturity at a price of S$0.54 per share. If all 705 million warrants are issued and exercised, they will bring in a further S$380 million ($261 million). The structure is similar to that of Pacific Andes Holdings, which is also offering warrants to entice shareholders to sign up.

Singapore features at the top of the Asia-Pacific rights issue league table this year with 50% of the offering volume, according to Dealogic. Companies in the city-state have raised $3.5 billion year-to-date from 19 rights issues.

In a statement, Golden Agri-Resources describes the transaction as "forward looking" and says it intends to use the proceeds for three main purposes. The first 20% will be used to support the company's organic growth by funding the acquisition of land, the planting of palm trees, and the building of new mills and refineries. The balance will be split between funding acquisitions and general corporate purposes.

The company's largest shareholders -- Massingham International, which has an 18.8% stake, and Flambo International with a 27.8% stake -- have both stated that they will take up their entitlements. According to Bloomberg, the investor with the next largest stake is Van Eck Associates Corporation, which holds 0.7%.

BNP Paribas, Credit Suisse, and UBS are the joint lead managers and joint underwriters. The books are expected to close during the week of June 25; the last day for acceptances will be in the week of July 13; and the new shares will list during the week of July 20.

The company cultivates and harvests palm oil trees. It has just under 400,000 hectares of planted land in Indonesia, as well as 33 palm oil processing mills, three refineries, and five kernel crushing plants. Its China operations include a deep-sea port, as well as storage and oilseed crushing facilities in the cities of Ningbo and Zhuhai.

The company's share price has gained steadily over the course of the year and is up 48% year-to-date. First-quarter earnings, released in mid-May, disappointed both analysts and shareholders, leading to a dip in the share price, although shares have recovered since then.

Due to the rapid rise in its share price, Royal Bank of Scotland changed its recommendation for GAR from "buy" to "hold", in a report published on Tuesday. Although gross profits were down 76% year-on-year, when adjusting for non-cash gains, operating earnings were up 32% quarter-on-quarter.

Things are likely to get better for the company. The RBS report described poor first-quarter results as a "temporary setback" brought about by drought-like conditions in certain regions in Indonesia.

"We are confident that the company can produce reasonable numbers in fiscal 2009. The weather patterns are restricted to a part of Indonesia and are unlikely to persist for more than two quarters," said the report.

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