BSRT : Baker Steel set for massive expansion
Baker Steel Resources Trust, which at close of business on Friday 7 November had a market capitalisation of £19.8m and was trading at a discount of 47.2%, has announced details of a considerable expansion of the fund via 1) a stock swap of investments for new equity in Baker Steel Resources with a value of up to £90m and 2) an issue of new equity for cash with a target size of up to £100m.
The stock swap is with funds managed by Baker Steel Capital Managers LP (the manager) and funds managed by Salamanca Group Investors Limited. They say that most of these investments are companies that Baker Steel Resources Trust already owns. £25m of these deals are ready to do – the balance will be done when the transaction completes. The assets to be acquired are split roughly 60:40 listed to unlisted. When they issue new Baker Steel shares to fund the acquisition, the unlisted holdings will be valued at asset value but the listed holdings will be swapped in for shares valued at a 15% discount (diluting existing shareholders). Following the deal, Salamanca will become an additional investment adviser to the fund.
The fund raise is for equity valued at a 15% discount to asset value (again diluting existing shareholders) and, to compensate in a small way for this dilution, existing shareholders will be offered the chance to buy these shares first in an open offer before they are placed with outside shareholders.
The investment managers are justifying the deal on the grounds that they think the commodities cycle is close to its trough.
Once the deal is done, Baker Steel Resources Trust plans to defend a 15% discount from July 2015 using buy-backs funded from 50% of the net proceeds of any realisations. They also plan to distribute 15% of net realised cash gains to shareholders.
All this needs to be approved by shareholders at a meeting which they expect to hold later in November. We reckon that a shareholder who doesn’t take up the open offer will see their net asset value diluted by 9.5% (assuming the maximum number of shares are issued). If the shares ended up trading on a 15% discount as a result however, existing shareholders would get a 45% uplift over the current share price.