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Along with the trend of uncapitalised small caps issuing more shares for injections of cash, Pinnacle Point has just issued a detailed announcement revealing its rights issue intensions. The old AccRoss listed property development group has hit a serious snag with demand for its property developments following the local property market down. Despite this slump in demand, the group has raised signficant debt and has signficant working capital needs. Because of this shortfall, the group has decided to follow through with a rights offer that will see it raising R195 million of new equity and converting debt worth around R165 million into shares. The vast majority of this debt is owing to ABSA. Given the SSF debaucle earlier this year that saw ABSA landed with a number of stakes in small caps, ABSA will be the major beneficiary of the debt-to-shares rights issue. This will boost the bank's stake in Pinnacle Point from 27,4% to over 35% and, according to JSE rules, constitute an "affected transaction". An affected transaction in this regards means that ABSA is required to make a manditory offer to all shareholders for their shares, but the rights issue is dependent on shareholders ceding this right to ABSA. In other words, it looks like ABSA is looking to protect it equity stake in Pinnacle and the loans its extended to the group, by way of a capital injection and a paper entry. The worry lies in the fac that the bank obvious does not want to increase its stake in any way beyond what it has to in order to protect its own money...hence the conditions surrounding the ceding of the offer to all shareholders. No mention of what price the rights issue will be done, but the chances are that it will be at a slight discount to the current share price of 13c or the price at close on 9 October 2009 (being the last day to trade with the rights issue attached to the share). Should shareholders take up these rights...? The short answer is "probably not"...but the full answer is really dependant on the pricing of the rights, each shareholders personal situation and the faith in Pinnacle Point's managements' ability to realize value after this dilution. At least ABSA will soon have a bigger interest in the group and will be wanting a return while keeping management on a tight leash.
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