IAG, the parent company of British Airways, is currently raising €2.74 billion from its shareholders via a rights issue. If you took up 100% of your allocation, you might have been a mug – Alex Cruz didn’t.
Let me recap how rights issues work. New shares are offered to existing shareholders pro-rata to their existing holding. These shares are sold at a discount to the current price.
Shareholders have two choices. They can either buy the new shares they are offered (and so retain their proportional shareholding in the company) or they can sell their rights and be diluted. They can also choose a combination of the two if they wish.
The rights have value because whoever buys them can purchase shares at a discount to the current price.
It lists all of the key personnel at IAG and how they dealt with their rights.
You would expect the key management to fully subscribe for their rights. This is because:
a) they should be confident in their ability to raise the share price and so make a profit and
b) how can you expect your shareholders to put their hands in their pockets when the management team won’t do it?
Mid-ranking staff might be expected to sell some of their rights in order to pay for the remainder – so they essentially come out quits in cash terms – but you would expect a strong commitment from the leadership team.
Let’s look at who DIDN’T take up all of their rights.
Step forward Alex Cruz, Chairman and CEO of British Airways.
Cruz was entitled to buy 95,202 shares. He only bought 24,392 of them, paying €22,440. He sold the rights to the remaining 70,810, pocketing €33,634.
To be fair, Alex doesn’t run IAG. Let’s look at what IAG’s CEO, Luis Gallego, did.
Gallego was entitled to buy 454,299 shares. He only bought 196,991. He sold the rights to the remaining 257,308.
Did the CEO of Iberia put his hand fully into his pocket? Let’s look at what Javier Sanchez-Prieto did.
Sanchez-Prieto was entitled to buy 234,122 new shares. He only bought 92,052. He sold the rights to the remaining 142,070.
Compare this behaviour to Antonio Vazquez, Chairman of IAG, who spent over €500,000 to take up 100% of his rights.
There is absolutely nothing wrong in any of this, of course. These people were free to take up or sell their rights as they wished.
However, if you paid up for your full allocation, you might be wondering why Cruz, Gallego and Sanchez-Prieto didn’t.
PS. IAG got in touch to say that, where executives did sell their rights, it was only to the extent that the income generated was to cover the cost of the rights they acquired.
The UK tax treatment of the sale of rights during a rights issue is hugely complex and this claim cannot be verified due to the information required. For UK taxpayers the maximum CGT bill due – assuming a zero base cost – would be 20% of the gain which does not tally with the numbers above.
Even if the sums do net out, it does not change the key thrust of this discussion, which is that key management have – in the main – not committed any fresh money to the company.