Event Analysis
Redefining speculative
Less than four weeks ago, VPG announced its full-year results together with a proposal for the looming remaining payment for the Scarborough European business, which it bought at the peak of the boom on deferred terms. The remaining payment of $60.7m was to be a combination of 3m cash due at the end of September, up to 19.9% of the units in VPG at 10cpu (unless rejected by unitholders, when this portion would be converted into a loan at 15% pa interest) and the balance as a loan at 9.5% pa interest. We described this proposal as ‘simply incredible’, as it added even further costs to an already enormous loss of unitholder funds. Following investor feedback, VPG decided to replace this proposal with a cash payment of $60.7m funded from a heavily-discounted, highly-dilutive capital raising. VPG will raise $59.5m through a $40.2m institutional and retail 1-for-4 entitlement offer and a $19.3m institutional placement. The offer at 10cpu represents a 37.5% discount to the closing price of 16cpu and a 50% discount to the diluted NTA of 20cpu. Such a litany of disaster supports our view that the levels of prudence, conservatism and risk aversion required for the current downturn do not optimise the skills of the current board and senior management. While the entitlement offer is fully underwritten, this is at a staggering cost to unitholders of around $3m or 5% of capital raised. Following the capital raising and dilution, our valuation falls to 15cpu and our recommendation downgrades to Hold. Reflecting the discount to valuation and dilutive effect if foregone, our recommendation is to take up the entitlement offer which closes on Tuesday 20 October 2009. VPG is currently high risk and should only be considered by investors willing to speculate on a positive medium-term outlook.