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Did you take up the IAG rights issue in full? Alex Cruz and IAG’s CEO didn’t

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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.

IAG has just filed this document with the Stock Exchange.

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.

Alex Cruz British Airways CEO

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.

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Comments (73)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Novice says:

    I don’t believe that I have shares but I didn’t tk up the rights and sold them because as I see it atm there’s plenty of companies of the future which I could invest the same amount of money in and get better returns.

    • Rob says:

      If you are ‘glass half full’ BA is a great investment. The average BA flyer is the person who has made a big profit this year – full salary, no commuting costs, no expensive clothes etc.

      With money to burn, a nice holiday or two once a vaccine is widely available after Christmas looks like a great idea.

      Fares shoot up, BA is rid of its least efficient aircraft, crew costs are well down …. profits shoot back up.

      This is the positive view of course ….

      • Novice says:

        Yh but I already have shares as I said and I’m optimistic pessimist I believe that aviation still needs a massive change to be up to the job in future and I’m young and healthy enough that I might still be around when another pandemic hits/climate change gets worse so I see covid as the practice run really. It’s going to get a whole lot worser before it might get better.

      • John says:

        The comparison is whether other investments now are likely to outperform investing more in BA now, not whether BA is likely to be profitable in the future.

    • Lady London says:

      Warren Buffett thought so too apparently.

      There will be a massive profit to be made on BA shares it just depends when. I have @Shoestring at my shoulder as I write this.

  • Anthony J Heather says:

    Point well made. I can only hope that a journalist, when the next opportunity arises, asks them why they didn’t!

  • AJA says:

    The only person who looks good in this is the IAG chairman who took up his full entitlement.

    That said there is no rule that says they must take up their full entitlement.

    I wonder what the investment banks that underwrite the rights issue think of the lack of enthusiasm displayed by these individuals. I suspect that the ratings agencies will take a dim view

  • Nick says:

    Would BA/IAG have been allowed to pay for the rights on behalf of senior management? Therefore ‘encouraging’ them to take up 100%? I’d hope this is forbidden but you never know!

  • Tom says:

    Great bit of journalism exposing these feckless leaders. Very representative of their leadership style.

  • Pangolin says:

    Why isn’t Cruz pictured wearing his Hi-Viz jacket?

    You slipped up there!

  • Moley says:

    Looking at the splits. It appears they all sold enough rights that, once tax was paid, gave them enough capital to buy the rights that they actually bought. ie they all effected a cash neutral transaction. This is not unusual.

    • Ralph says:

      Correct! This is totally standard procedure usually referred to as “tail swallowing”. Even very highly paid people may not have pots of cash readily available, so selling sufficient rights to raise enough funds after costs/tax to take up the balance is the norm. The underwriting banks will normally aggregate a pool of director/management/staff/ESOP scheme rights and sell them in the market, so it is done in a transparent and controlled way.

  • Neil says:

    In times like now of great uncertainty confidence is a key factor . The current senior management have not demonstrated that in their own business- perception and image. On the other side as individuals they will already have a high degree of risk invested in the Company so adding more purely from a personal viewpoint may not have seemed prudent.
    In a time of high stress people- shareholders- look for strong and confident leadership.

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