It must be getting clearer–to the discerning TCL shareholder–the main reason for the removal of the former TCL Board and Group CEO in August 2014. This had nothing to do with "performance" but was really a thinly-veiled plan to hand control of TCL to Cemex, as was promised by certain businessmen in 2002.
According to the current script, the present board's plan is as follows:
1 Keep the OWTU silent by agreeing to all their demands. Remember in 2002, the OWTU (led by Errol McLeod) was a major obstacle to the removal of the 20 per cent cap on shareholding as McLeod managed to rally credit unions and pension plans to vote against the proposal. However on this occasion, Cemex and its supporters (UTC, NIB, RBL) have removed the board and quickly settled all outstanding matters with the OWTU to keep them quiet while they execute their real plan, which is to take over the company. Once they take over TCL, then they will execute their rationalisation plan to the detriment of the TCL Group but in favour of Cemex's regional agenda.
2 According to the report in the T&T Guardian of December 30, 2014, the company intends to retire US$50 million or 18 per cent of the approximately US$280 million in debt via a Rights Issue. The current TCL share price is $2.50 but this price is likely to fall steeply over the next few months and could even get below $2. Shares issued during a Rights Issue are normally offered at a discount, so it is likely that the shares will be issued at around TT$1.90 or US$0.30 per share. This will require the issuance of 166 million shares on top of the approximately 250 million shares currently on issue–a 66 per cent dilution. TCL will therefore end up with an issued share capital of 416 million shares.
3 With the annual after-tax savings estimated at TT$30 million in interest from the retired debt plus around 50 basis point savings on overall interest, this will contribute an EPS of around TT$0.07 on 416 million shares. If we assume that TCL would have achieved an EPS of around TT$0.50 in 2014 on 250 million shares, with 416 million shares, the same profit will now give an EPS of around TT$0.37 or a 26 per cent reduction.
If we assume price-earnings (PE) of 8x, then in the current scenario (250 million shares), shareholders could have expected their share prices in the TT$4-$5 range but with the heavy dilution, the share price will more likely be in the low TT$3 range.
4 Furthermore, few people are likely to take up their rights with the result that Cemex's shareholding could move from the current 20 per cent (50 million shares) to around 210 million shares (assume that they get 160 million new shares) or 50.5 per cent (really 58 per cent since they also own Baleno). Cemex will then be required under the Takeover Code to make an offer to all shareholders at the rights price (TT$1.90) so shareholders will be left with the option of a persistently-anemic share price going forward (due to the high level of dilution) or to cash out at a low price (TT$1.90).
5 The pre and post–Rights Issue scenarios are illustrated in the table above.
This is the problem with raising equity to pay debt. Equity tends to be permanent, whereas debt will eventually be paid down. Also, equity is best used to pay off debt when the share price is high (Guardian Holdings $40 Rights Issue) so that the level of dilution is low and then the transaction becomes accretive.
I also believe that shareholders should be given the entire picture before they "give away" their company and the Board should ask shareholders' permission to proceed with a 66 per cent dilution before they remove the 20 per cent.
I have always maintained that the TCL 20 per cent limit on shareholding is valuable and anyone who wants it removed must pay a premium. The current board wants it to be given away for nothing.
In my view, the current proposal is not in the interest of the company or the ordinary shareholders, as it was tailored to give Cemex an opening to take over the company with minimal outlay. From a Corporate Finance perspective, it does not make sense.
However, given the composition of the current board (not enough independent directors and with 40 per cent Cemex) I expect that directors will encourage shareholders to proceed. Once again we are seeing the failure of Code of Corporate Governance as several members of the current TCL Board are in violation of the newly-finalised Code of Corporate Governance.
Therefore, I am calling on all TCL shareholders to reject any proposal to remove the 20 per cent shareholding as well as any proposal for a Rights Issue with such a high level of dilution. Even though the current board came to power with many promises of "better days" shareholders can now see "true agenda."
Trinidad Cement Limited is the largest indigenous manufacturer in Caricom and can be managed by Caribbean people. We do not need to hand it over to the likes of Cemex who continue to struggle financially and have recorded losses since 2010.
Rights Issue Analysis UOM Year 1 Year 2 Year 3
Current shareholding Shares 249,765,136 249,765,136 249,765,136
Current Debt at 10% US$ $280,000,000 $255,000,000 $230,000,000
Estimate profits TT$ $125,000,000 $135,000,000 $145,000,000
EPS TT$ $0.50 $0.54 $0.58
Potential share price TT$ $4.00 $4.32 $4.64
Rights Issue Shares 166,000,000
New Shareholding Shares 415,765,136 415,765,136 415,765,136
New Debt at 9.5% US$ $230,000,000 $205,000,000 $180,000,000
After Tax Savings lower debt/int TT$ $30,000,000 $30,000,000 $30,000,000
Estimate Profits TT$ $155,000,000 $165,000,000 $175,000,000
EPS (Earnings Per Share) TT$ $0.37 $0.40 $0.42
Potential share price TT$ $2.98 $3.17 $3.37
Profit to maintain Base Case EPS TT$ $208,078,048 $224,724,292 $241,370,536
Additional Profit Needed TT$ $53,078,048 $59,724,292 $66,370,536
Per cent additional profits % 34% 36% 38%?
Rollin Bertrand, PhD, DBA
TCL shareholder