New share issuance
On April 8, 2014, Nordic American Tanker Ltd. (NAT) dropped ~10% from the prior day to ~$8.50 a share. The company announced on Monday April 7, 2014, that it would offer a follow-on offering of a previous announced offering of 10,000,000 common shares at a price of $8.62 per share, while the underwriters Morgan Stanley and Global Hunter Securities will have a 30-day option to purchase an additional 1,800,000 common shares. Because of strong demand, the company agreed to increase the offering to 12,000,000 common shares.
This isn’t the first time the company issued a follow-on offering (when a public company raises capital from the public market). On April 2, 2013, the company announced an offering of 9.75 million common shares priced at $9.60 per share. A day earlier, the stock was trading at ~$11.58 a share, although shares had fluctuated around $9.00 for four months before that. On November 22, 2013, the company also announced its plan to sell 8,125,000 shares at a price of $8.00 per share, on the lower range of what the company was trading for a few months earlier.
Nordic’s peers, such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), and Tsakos Energy Navigation Ltd. (TNP), have all raised equity in the past, which can have a negative short-term impact on shares. To protect yourself from these risks, investors might consider the Guggenheim Shipping ETF (SEA).
Unlike an IPO (initial public offering), a follow-on offering doesn’t include a price range, because shares are priced in relationship to the market price, according to David Stowell—author of An Introduction to Investment Banks, Hedge Funds, and Private Equity.
Since new shares are priced in relationship to the market price, investment banks don’t go through a valuation process to establish a price range, and would instead focus on the most effective marketing plan for the offering. These include the appropriate size of the offering, the targeted investor base, and the appropriate price to set in relation to the price of outstanding shares at the time of the offering.
Still, a large increase in supply often results in lower prices. While negative for people who were investors, shares would recover if future earnings weren’t diluted (when earnings per share fall because of increased share count). This series will examine whether such case will happen, and what Nordic might be worth in the market.