NZX probes nether regions
Forsyth Barr chairman Sir Eion Edgar says an NZX inquiry into potential share trading anomalies at market minnow Blis Technologies is making "a mountain out of a molehill".
"It was just straightforward arbitrage," he told me last week.
He has a point. Blis is one of those companies that clings to the nether regions of the stock exchange with the tenacity of a limpet, but offers few signs of life beyond a periodic squirt of red ink.
Its shareholders have not been rewarded for their interest - the last annual report showed accumulated losses of $26 million.
After a flurry of publicity when it was floated by the late Howard Paterson in July 2001, its main product - a sore throat preventer called K12 Throatguard - has dipped well below the radar.
On March 22 it announced its operating loss for the year to March 31 would be $1.9m, followed by a loss of $0.8m in 2013, which "would exhaust the company's existing cash reserves".
More capital would likely be required, it said, and the shares plummeted from 4c to 1.5c in a single day.
In short, Blis is a penny dreadful. Anything it does is by definition molehill-sized.
However, the same can't be said for Edgar, a senior stockbroker and one of the South Island's foremost movers and shakers.
So when the NZX says it has spotted potential anomalous trading in Blis shares and among the traders was a company associated with Edgar, the molehill starts to look quite a bit bigger.
Without beating about the bush, the issue being discussed here is whether market manipulation took place.
To recap. The NZX said the following on Friday just over a week ago:
"NZX Market Supervision (NZXMS) confirms that it has commenced an inquiry into trading in shares of BLIS Technologies Limited (BLT).
"NZXMS initiated the inquiry after its Market Surveillance staff detected potentially anomalous trades in BLT shares during the period when the price for the conversion of cumulative preference shares to ordinary shares was being determined.
"The conversion occurred on 8 May 2012.
"NZXMS believes it is in the interests of market clarity and confidence to confirm this action."
Blis has said nothing about it, other than to confirm its independent directors "have written to both the NZX and the Financial Markets Authority seeking assurances that certain trading of ordinary shares in BLT that occurred during the period in which the share price under the terms of conversion of the cumulative preference shares was determined did not breach NZX rules and/or relevant securities legislation".
It is apparent from these statements that they are talking about the conversion of preference shares into Blis equity on May 8.
The conversion rate was to be determined by the Blis share price in the 20 days prior, such that each preference share would buy $1 worth of ordinary stock. Thus the lower the Blis share price, the more each preference shareholder would acquire.
In the event the conversion price was 1.342c, leading to the issue of about 300 million new shares - equivalent to a Blis stake of about 62 per cent.
Out of 4 million preference shares on issue, the last Blis annual report shows 2.09 million were held by Edinburgh Equity Nominee, a company associated with Edgar and Dunedin investor Tony Offen, also a director of Blis.
According to substantial security holder notices filed to the NZX, between May 2 and May 7, Edinburgh Equity Nominee sold 2.7 million ordinary shares for about $36,000, reducing its stake from 10 per cent to 8.5 per cent.
The market price of Blis shares fell from 1.8c to 1c during the period.
After the share conversion Edinburgh Equity Nominee disclosed a stake of 36.9 per cent in Blis Technologies.
Edgar says the shares sold by Edinburgh Equity Nominee were his, and there were two reasons for the sales. One, the shares had experienced a small rally to 2.5c during April.
"They'd been trading around 1.5c before, so I think people just said they were overpriced and they need to be balanced."
His were not the only sales in the 20-day period, he says.
Two, "I needed a wee bit of extra cash at the time so I was happy to sell. It's a free market - anyone can buy, anyone can sell. That's what markets are for, aren't they?"
I don't know whether the NZX will find anything untoward in these circumstances, but it is not a good look for the Forsyth Barr chairman to be caught up in such an inquiry.
After their support for the company over the years, no-one would begrudge Edgar and other key shareholders an opportunity for a return on investment. But whatever the return is, it's not worth being pinged by the NZX.
Correction: Last week's column on Metlifecare incorrectly said the company was advised by Goldman Sachs. Metlifecare's board was actually advised by Grant Samuel. I apologise for the error.
Tim Hunter's blog, The Bottom Line, is on Businessday.co.nz
Sunday Star Times