Entitlements Offer

Summary

• Excluding US investors could backfire.
• Lack of ASX interest.
• Nant could be big winners.

The decision to make some investors (US retail investors) ineligible to participate in the current round of capital raising may backfire on Benitec (BNTC). The Australian stock market (ASX) has shown little appetite for the entitlements offer and ordinary shares can be picked up at half a cent (about 3%) less than the Offer price. Management has often said that the US is the prime capital market in the world, so why exclude a whole cohort of US investors if management is serious about raising more money?

All of the company directors will be taking up their share of the entitlements offer, which is a vote of confidence, but the broader biotech/pharma industry has yet to endorse the company’s pipeline. Even the Nant group, which took a 28% holding in the company, is reducing its exposure through the return of capital via milestone and royalty payments from a program that it linked to its investment in Benitec. The current lack of broad industry endorsement is both a threat and an opportunity. Effectively, anyone buying shares in the company is betting against the market. This can reap great rewards but, as we have seen in the past, it can also lead to losses.

Highbridge clearly sees an opportunity as it is taking 15.5M shares in a placement made to it by Benitec. This will raise a very modest US$2M, and, in view of the current lack of interest being shown on the ASX, a larger placement to Highbridge should be considered, if they are interested that is. A larger holding by Highbridge would help to off-set the inevitable rise in the size of Nant’s share of the company. At the end of the capital raising process, if the lack of ASX interest translates into limited shareholder participation, Nant will hold more than 30% (up to 35%) of the company.

This is where excluding investors that live in the US may backfire. Control of the company will likely fall dangerously close being in the hands of Nant as the US retail investor ownership percentage is diluted through this Entitlements Offer. Nant’s dominance in the share registry could prove to be a roadblock to non-dilutive capital flowing into the company from other potential partners. I am not saying that this will happen but it is a real possibility and one which could limit and slow share price growth. If Nant did take control of the company, it is possible that assets could be transferred out of Benitec and into a Nant group company. This would severely disadvantage existing Benitec shareholders.

Benitec has been to the market for capital many times in the past and has always managed to stay afloat. This time is different because Benitec has never before had a major shareholder with Nant’s interests and capabilities. In the past, investors only needed to consider if the technology would deliver results. Today, investors still need to consider the technology but they also need to consider if benefits of a successful technology will be transported to a Johnny-come-lately investor, leaving retail and long-term holders short-changed!