The Tribune

A welcome development for our capital markets is the recent announcement by Cable Bahamas of its one-for-eights rights offering to its existing shareholders. They will be entitled to subscribe for one new ordinary share for each eight of the 41 million shares outstanding, creating a total of 5.1 million new shares at the subscription price of $6. The $31 million total proceeds will provide funds for expansion here and abroad. This is, I recall, the first Bahamian rights offering since a smaller one by Abaco Markets 16 years ago, and the only public share issue since Arawak Port Development Company (APD) in 2012.

Fundamentally, I believe this is an attractive investment because Cable Bahamas is a well-run, imaginative company, and is the only BISX-listed issuer that has succeeded in operating a foreign business (in Florida) and earning US dollar revenues. I am also impressed by the charts and figures projecting probable growth of the mobile phone business once Cable, through a new affiliate, enters the market as a competitor to BTC. Present shareholders will be inclined to participate in order to avoid dilution of their holdings.

Nevertheless, I find that the Offering Memorandum provided by RoyalFidelity fails to give information on certain key points that investors may need to make an educated decision. I outline these points as follows.

Pricing. The Offering Memorandum fails to mention that the $6 subscription price represents a discount of 17 per cemt from the latest BISX quoted price of $7.25. It also omits the key figure of the ex-rights share price of $7.11 (by standard weighted average calculation). The real problem is that there is no way to judge whether either of these two prices reflects present fair value.

A share price always depends on a company’s reported net income, but for Cable Bahamas the latest annual earnings figures in the Offering Memorandum are over one year old, as of December 31, 2014, with interim figures for the nine months ended September 30, 2015, sharply down from the previous year. Cable would have been better advised to wait another month until figures for the full year 2015 become available, even if unaudited, which would give a much sounder basis to judge the pricing.

Furthermore, share pricing depends partly on future expectations, and it is surprising that Cable has not provided at least one year’s forecast (appropriately hedged as ‘forward-looking statements’). Its existing Bahamian business must be fairly predictable, aided by URCA’s recent approval of a substantial tariff increase for its basic cable TV offering, and management by now must have a pretty good view of the Florida subsidiary, Summit Broadband, with its four divisions now active and consolidated.

Even earnings from the new cellular business should be estimated, based on growth potential shown in the Offering Memorandum’s charts, with an explanation that Cable itself will enjoy only 48.5 per cent of these earnings from its partly-owned affiliate, the actual mobile licensee.

This additional information about historical and projected earnings would be most helpful in determining a fair share price, using a reasonable price/earnings ratio. I will not be surprised if some of Cable’s more cautious shareholders, experienced in technical analysis, are reluctant to invest in the rights offering unless this information is provided. Publishing a supplement to the Offering Memorandum, or holding an explanatory meeting, is not out of the question, since the directors are authorised to extend the close of the offering period by three months from the present March 4.

Risk factors. Among the long list of ‘Risk Factors’, no mention is made of the most obvious one: That the offering will not be fully subscribed, probably forcing Cable to borrow funds, alter its capital structure, and reduce earnings.

This risk could be eliminated by the simple expedient, often found in US, UK and Canadian markets, of arranging an underwritten offering, in which a group of banks and institutional investors undertake, for an agreed fee, to take up any unsubscribed shares.

Of course, this adds to the issue expense, but gives assurances that the expected funding is certain. A partial version was included in the Abaco Markets issue. Although full underwritings are still unknown here, the innovation could well start with Cable Bahamas, an established company with a strong track record.

Also, subscription rights could be made transferable, as was permitted with Abaco Markets. For shareholders who do not wish to subscribe, the present non-transferable restriction means that their rights will expire worthless, and it prevents other interested investors from stepping in to provide capital by subscribing.

Caveat regarding the Share Price. The $7.25 figure, the BISX-quoted price on the last day before the announcement of the rights offering, should be regarded with caution as an indicator of fair value.

Trading in this security has been very thin; at a zero level over recent trading days. Also, as noted above, published financial information about Cable is unfortunately stale and incomplete.

Expenses. There is no statement of the issue expenses that Cable Bahamas will incur. Doubtless RoyalFidelity, as advisor and placement agent, is not undertaking this complex transaction without a fee, or absorbing all printing and other out-of-pocket costs.

Individual Subscription Form - a minor irritant. Banks are hamstrung by technical ‘know your customer’ rules, but it is surely absurd to require an applicant to provide a copy of a passport instead of just its number, particularly when all subscription payments can be verified as coming from licensed Bahamian banks.

I do hope the offering will be successfully completed. The foregoing remarks are intended solely for guidance to shareholders seeking to avoid dilution, all of whom should reach their own decision on the basis of their own analysis.

• NB: Disclosure Note:

The author is an ordinary shareholder of Cable Bahamas, eligible to participate in the rights offering. Comments are welcome at e-mail rcapmashy@gmail.com