Qualiport

EMAP rights issue explained

By Bruce Jackson (TMF Googly)

Kilburn, London -- Who lit the rocket beneath the share market? Today the FTSE 100 jumped an amazing 191 points, easily closing above the 6000 level. It is now well within reach of its previous closing record of 6179, achieved back in July last year. From its recent low point of 4649 in early October, the index of leading shares has gained an amazing 32%.

Some investors, particularly those new to the game, must be asking themselves how long this lark has been going on for. The stock market has existed for quite some time now, so it is nothing new. Over all those years, we've no doubt seen quite a few steep advances such as those we're currently witnessing. On the downside, though, we've also seen plenty of falls.

Here at the Fool, we always view any investment in the market as a long-term one. Therefore, when the market rises precipitously -- as it is now -- we try not to get too excited. We know that these gains could be reversed, and more, at virtually any given time. That's not meant to scare you, but just to state the facts. Here's what we really get excited about, and it's our little secret:

The market goes up and up, over the very long term.

The Qualiport has started 1999 on the back foot. Without any information technology, pharmaceutical or, particularly, telecommunications companies in our portfolio, we've got our back against the wall. I now know what it must have been like for the England cricketers facing MacGill and Warne on that spinning Sydney wicket.

Rather than make excuses such as "how can we beat the Footsie if we haven't got any companies from those sectors in our portfolio?" we'll face facts. Nothing has been stopping us from buying shares in companies in those sectors. Arguably we should have, as they are the three hottest UK growth industries kicking. However, being a value investor, I believe in buying a part ownership in a company only if the price is right.

In the past, I have assumed many of the high flying IT companies have been overvalued, so I haven't looked any closer at them. Similarly, the pharmaceuticals and telecommunications companies have appeared overvalued. But I haven't really looked close enough and in the past haven't placed what I consider to be a fair value on them. That's where the Qualiwatch series comes into play. We are attempting to identify 6 of the best companies in the world and then assign a valuation to them. When we look a little closer at some of them, we may in fact be pleasantly surprised at their valuation. We'll get back to that on Friday, when I also want to confess to unintentionally confusing readers over the strategy of the Qualiport.

EMAP Rights Issue

EMAP (EMA) shareholders may have been a little disillusioned with yesterday's apparent 61p fall in the share price, especially given the market's strength. Although, because of our long-term perspective, these short-term price movements shouldn't worry us, it did look rather alarming. At first, I put it down to renewed market nervousness over the Petersen acquisition. I have read in the press, and it was reiterated on the message boards, that Petersen is the perfect fit for EMAP.

Emap could not have found a company closer in culture and temperament to itself than Petersen.

However, that is followed by a potentially sobering quote.

But tactically, the acquisition might have been timed to come cheaper. They paid the wrong price at the wrong time in the cycle, given that the ad market seems to have peaked.

Hmm. Let's see. The FTSE 100 closed at 5557 the day the acquisition was announced. Today, it closed at 6149. That's a gain of 11%. In theory, therefore, if EMAP were to buy Petersen today, they may have to pay 11% more than they offered just 3 weeks ago.

The point is that no-one can time the market. No individual trader has the luck to be able to pull off the miraculous -- to buy at the market trough and sell at the market peak. EMAP are no different. As far as they were concerned, Petersen was the perfect fit. EMAP offered what they considered to be a full and fair price for the company, and the deal was painlessly announced. No bidding war, no acrimonious words, no shareholder angst. It is anticipated that the current Chief Executive Officer (CEO) of Petersen will join the EMAP board and, more importantly, continue to head EMAP Petersen, as the merged entity will be called. Everything appears hunky dory.

I haven't yet read, let alone digested, the 83 page offer document that was posted to EMAP shareholders in mid December. Listed in it are some details about Petersen and all the numbers you could ever dream of. One comment from that document perhaps sums up just how close the EMAP/Petersen fit could hopefully be:

"Petersen... is now one of the leading special interest magazine publishers in the US. Its titles enable advertisers to reach more young men (aged 18-34) than any other US magazine publisher."

EMAP followers will know that they are the owners of the biggest selling monthly magazine in the UK -- FHM. What's its target audience? Men, aged 18 to 34, although I'm sure a few older folk wouldn't be averse to having a peek.

At the time of the acquisition, EMAP themselves admitted that they were paying a full price for Petersen. The market initially freaked at this and marked the shares down to 965p on the day the acquisition was announced. But, since then, the share price has rebounded to as high as 1150p before settling at today's 1080p.

Back to yesterday's sharp movement in the EMAP share price. That was as a result of the shares being quoted ex-rights. Here's what happened.

EMAP is raising £359m using a 1 for 5 rights issue at 875p. This will result in lots of additional shares being issued and therefore a dilution to existing shareholders' holdings.

Share price as at 4th Jan 99 -- 1139p

Ex-rights

a. 5 existing shares @ 1139p = 5695p
b. 1 new share @ 875p = 875p

Total value a + b = 6570p

6570p * 5/6 = 5475p

5475p/5 existing shares = 1095p

This is the ex-rights price.

Last night, the EMAP share price closed at 1078p. The Financial Times correctly listed the loss on the day as 17p (1095p minus 1078p), even though the share price appeared to fall by 61p (1139p minus 1078p).

It looks like shareholders have lost out, but that's not the case. We have the right to subscribe for one new share for every five we already hold, at a price of 875p. Considering the shares were trading at 1078p, we will be sitting on a nice little paper profit. This effectively wipes out the share price fall because of the rights issue dilution.

Rights offers are tradable between the time the shares go ex-rights and the time the deal is fully completed. In the case of EMAP, the last date for renunciation is 16th February. The difference between the rights issue price of 875p and the 1078p share price is 203p. If you look in the Financial Times, you will see in the "Other London Market Data" section that the EMAP rights were trading at a 194p premium. That is slightly less than the 203p difference because there is a chance (albeit it rather small) that the rights issue will fall through. It also reflects a time value.

Hopefully that explains a few of the ins and out of rights issues. We've got until 26th January before we have to decide whether to take up our rights, but the chances are that we will. We still continue to have confidence in the EMAP management. Before then, we will have a closer look at EMAP's valuation. Because of a change of accounting rules, the price to earnings ratio (P/E) is now completely useless as a valuation tool.

See you on Friday. In the meantime, feel free to comment on all things Qualiport on its own special message board.

                    6/1/99 Close

              Company   Change   Bid
               EMA      0.03    10.78
               IIG     +0.07     2.53
               MKS     +0.11     4.17
               PIZ     +0.10     7.80 
               RTO     +0.09     4.51
               ULVR    +0.30     6.92

Qualiport Stocks

Last Rec'd Total # Company  In At  Current  Change
 19/12/97   783      RTO     2.55    4.51    76.9%
 17/07/98   298      ULVR    6.72    6.92     3.0%
 04/11/98   245      PIZ     7.93    7.80    (1.6%)
 27/10/98   755      IIG     2.58    2.53    (1.9%)
 17/04/98   169      EMA    11.85   10.78    (9.0%)
 11/05/98   368      MKS     5.54    4.17   (24.7%)

Last Rec'd Total # Company   In At     Value     Change
 19/12/97   783      RTO    2046.53   3531.33  1484.80
 17/07/98   298      ULVR   2052.54   2062.16     9.62
 04/11/98   245      PIZ    1966.34   1911.00   (55.34)
 27/10/98   755      IIG    1972.64   1910.15   (62.49)
 17/04/98   169      EMA    2052.57   1821.82  (230.75)
 11/05/98   368      MKS    2054.11   1534.56  (519.55)


Cash:                               £3,984.36
Current Total :                    £16,755.38

Total Invested:                    £16,184.62
Profit/(Loss) :                      £ 570.76

Value Per Share

                    Day      Month      Year      
Qualiport          1.81%    -0.25%     -0.25%
FTSE 100           3.20%     4.53%      4.53%
FTSE All Share     2.86%     4.02%      4.02%

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