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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.

  • James says:

    Is there any tax implications here to explain this?

    Do they get rights on any share incentives that have not yet vested?

    • C says:

      With back of the envelope calculations, assuming he pays tax at 40 or 45% (UK rates), for AC it looks like he took a position that was, after tax, approximately cash neutral. This is not unreasonable; he very well may not want to deploy additional personal cash to increase his exposure to IAG.

      • C says:

        As a slight correction, by ‘increase’ his personal exposure, I meant to shift his personal portfolio form cash to IAG, by investing additional personal cash (and not using this cash for other investments); by not subscribing in full he is of course being diluted, and thus reducing his proportionate interest in IAG.

      • Rhys says:

        But isn’t that the worrying thing – that as CEO he doesn’t want to deploy additional personal cash to increase his exposure to the company he manages?

        • Rob says:

          Exactly. As the article says, this is exactly what you’d expect middle management to do. It’s not what you expect the board to do.

          • ChrisC says:

            But Alex isn’t on the IAG board.

            Why is he expected to take up his full allocation just because of his job? He may not have the cash to hand without selling other shares which could cost him financially.

            People should manage their own finances and not other peoples!

          • Rob says:

            That’s not how it works Chris. Top management are meant to go down with the ship. Who is going to have confidence in IAG when its own top team won’t even put their money in?

          • ChrisC says:

            Does it really matter though?

            Are the vast majority of passengers exercised over how many shares that Alex has or are they more exercised over the food offering or the seat or a flight cancellation? I think it’s the latter/

            Are people cancelling bookings because all of a sudden they have lost confidence because Alex difn’t buy up all his allocation? I don’t think so.

            Have there been any actual grumbles from the institutional investors over this?

          • Michael Jennings says:

            Of course, it is possible for any board member, executive or anyone else to show confidence in the company they manage to deploy personal cash at any time simply by using that personal cash to buy shares in the company. It’s not expected of them at normal times but yes, it is normally expected of them during things like rights issues. Situations in which executives and board members participage in rights issues to the full extent as a “statement of confidence” and then quietly reduce their holdings afterwards happen all the time, of course. That the BA management are not doing it now suggests that they lack confidence in their ability to do this over the next year, which is indeed worrying but not especially surprising, given the state of the world.

            From a personal financial perspective, you generally shouldn’t have too much of your personal wealth invested in the company you work for. If you do, the company going bust means you lose both your income and your savings, which is obviously bad.

            But yes, executives are supposed to show confidence by taking the risk.

          • Callum says:

            “Top management are meant to go down with the ship.”

            What an utterly bizarre sentiment.

            You know the “city folk” far better than I do, but anyone who genuinely follows that adage has a screw loose!

          • Riccatti says:

            Absolutely correct view, Rob.

            For an average investor it nearly always makes sense to sell rights and purchase in open market — if they so wish to increase exposure.

            And here, IAG stock price will be penalised from C-level management not standing up in one front.

            Employees and ordinary shareholders will feel correct to be cheated. They could sell rights too and buy cheaply in the open market.

        • Callum says:

          Not really, no. Maybe he doesn’t have hundreds of thousands of euros just lying around not being used.

          Even the implication that he isn’t 100% certain that the value will rise isn’t that bad in my eyes. If the senior management team were 100% certain that IAG is going to do amazingly well and prosper then I’d question both their sanity and their management abilities. How could you possibly be that certain part way through a global pandemic that’s crippled air travel with no end in sight?

          Do IAG shareholders genuinely think they weren’t gambling and that there’s zero chance of anything bad happening? I would hope not!

        • Novice says:

          Yes but there’s a difference between a CEO who is founder and a CEO just doing a job. Elon has said he’d go down with his ship so we tesla lovers love that and forgive him but as a shareholder I don’t expect any of these CEOs going down with the ship. It’s a bit like an owner occupier looks after the property better than a tenant.

          • Novice says:

            N @Callum, no I’m a realist I don’t believe they will be worth anything that I paid 10 yrs ago as my first stock, maybe in another 10 yrs time. So I didn’t tk rights up.

          • Lady London says:

            Good comment, @Novice. Btw do you actually have a Tesla and do you like it? The Tesla pickup is my aspirational vehicle but I dont think it will get type approval here.

          • Novice says:

            @LL, I don’t own a Tesla yet but I believe in the vision. I still drive my first car 🚗 audi but I’m a believer of Tesla and the enigmatic Musk. Can’t wait till level 5 automation I’ll be able to write in a car 😂

          • BLT says:

            @LL I’ve had a Tesla for 4 years and it is still an incredible car to own, and I own stock as I believe they are going to be a huge company in the next 5 years. The cybertruck is now only for the US market because of it’s huge size. They have said they will redesign one for the european market. It’s a bit to out there for my liking, I’ll probably get a Model Y next.

  • insider says:

    If you go back a few months to the beginning of March, you’ll see that Javier SP bought 70k IAG shares at €4.6 a share. That’s quite a hefty outlay, maybe his liquid cash had run out hence the lack of take up

    • Rob says:

      That’s unlikely, I suggest, unless he has multiple divorces to pay for – and these would have been Spanish divorces, so the ex wouldn’t have got much anyway!

  • Colin MacKinnon says:

    It has to be said that Walsh and Cruz etc seem to have known what they were doing – before Covid. Unlike many other legacy airlines, BA/Iberia were doing great for shareholders (and for the in-deficit pension scheme).

    So I don’t think the dire straights that IAG – and the rest of the airline industry – are in can be blamed on them. It’s a worldwide problem.

    But I am still shocked that they didn’t see fit to maintain their percentage stake in IAG by taking up their rights in full. It’s not as though they aren’t being paid enough to be able to afford it.

    They know more about the business than anyone else. So that begs the question:

    What do they know that we don’t?

    • TGLoyalty says:

      They probably have more tied up in IAG than they’ll ever make back after the share dilution. They are quite literally throwing good money after bad.

      Especially having bought shareholding’s at prices like €4.60+

      Someone whose in at an average £1.60-2 May think differently.

    • GaryC says:

      There’s often a misconception that just because you’re a board director that you’re not only generally minted, but have vast quantities of cash just lying around that you don’t know what to do with. I agree that not taking up full rights raises a slight eyebrow, but I think the teams pro-active management of this pandemic sends a far stronger positive message. His exposure to the firm is already significant.

  • marcw says:

    3Q will be a disaster for IAG, compared to LH Group and AF-KLM. The know this so share will fall dramatically.

    • Lashious says:

      I didn’t take mine up, just cos it’s a cheap buy, doesn’t mean it’s a bargain. Also Buffet didn’t think it was a good idea right now I read somewhere

      • Novice says:

        😂 I agree. I do tend to follow the oracle of omaha. He knows better than a lot of people.

    • insider says:

      Why will it be worse for IAG compared to the others? I have the feeling it will be terrible for all airlines.

  • Ralph says:

    This is the statement re director participation in the prospectus:-

    Each Director who is a Shareholder and who is able to participate in the Capital Increase has irrevocably undertaken to exercise in full or in part his or her Subscription Rights (the “Director Irrevocables”). In particular, Antonio Vázquez, Alberto Terol, Javier Ferrán, Maria Fernanda Mejia, Nicola Shaw and Giles Agutter, have confirmed their intention to take up in full their entitlement to subscribe for New Shares and Luis Gallego and Steve Gunning have confirmed their intention to take up in part their entitlement to subscribe for New Shares. In aggregate, the New Shares to be subscribed for by such Directors represents approximately 0.06% of the New Shares (1,771,636 New Shares) which will be subscribed for pursuant to the Capital Increase.
    Willie Walsh and Kieran Poynter, who both stepped down from the Board of Directors with effect from 8 September 2020, have irrevocably undertaken to exercise in part and in full, respectively, their Subscription Rights. In aggregate, this represents approximately 0.02% of the New Shares (743,841 New Shares) which will be subscribed for pursuant to the Capital Increase.

  • Rob Southern says:

    I see the value in the article, but it is a little unfair as this is standard practice and probably even more so given the current COVID situation we find ourselves in. How can BA’s senior leaders predict the future of COVID and any related lockdown/quarantine measures that may or may not occur in the future? And then there will be COVID-20 etc. or something else in the future (I can see this now as something that re-occurs every 3-5 years in the future). Why should as senior leaders they sign up for that lottery only to lose their own personal wealth as a result of factors completely beyond their control, no matter how hard they work to turn around the business. I would concur that the IAG & BA leadership has not done a great job in the past (as a silver/gold member over the last few years, they have made “a dog’s dinner” of many situations for me personally), but we all know that. So as an investor it’s your choice to invest future knowing the quality of the leadership. Personally, I have no investment in BA (other than the ££££££ I have spent with them over the years) and see BA as a glass half empty investment, the external factors are far too volatile + I have not faith in the leadership. However, give the price, some will see it as a good gamble.

    • Rob says:

      As the management team has inside information on current trading, you should also consider what sort of message this sends.

      • Rob Southern says:

        You don’t need to be a genius to know what current IAG trade looks like at the moment, now of all times.

        So the message it sends to me is they at least are half-smart not to plough more of their money into something that might ultimately fail or require more share rights issues/government bailout due to factors way beyond their control, regardless of their own performance as a management team.

        I know they aren’t a great leadership team, and personally, I think Alex Cruz is deluded about the service his airline provides vs. reality, but the HFP position on this just seems a little sensationalist.

      • Novice says:

        I read somewhere a few days ago that it was one of the most bought shares.

  • The Savage Squirrel says:

    At the most basic level of risk management, your share holdings should diversify away from you job, employer or source of income – as you don’t want an unexpected industry shock that may sink your company, render you redundant or reduce your income (Covid19 for example!) to also wipe out your savings wealth just when you need it most.

    Given this, I think it’s unreasonable to expect management to take anything more than a cash-neutral position in the rights issue … and could potentially flag up an inability to manage risk (although too may other factors in play to make a judgement just on that alone). I’d rather have a CEO or management that understands and controls risk in their personal life – as they are likely to do the same within their business.

  • Lady London says:

    +1. I know the Board and key execs are supposed to be seen to take up fully what they’re asking shareholders/investors/the public to invest in.

    But I’ve also worked with a few smart people inside the City who did not trade for themselves at all as they felt they were already exposed through their job. Outside the City I’ve also met people who did not join the company share purchase program as they did not want to risk their job and their shares tanking at once. Those people were really smart, although a lot poorer tgan they could have been.

    • Rob says:

      Most City people are not allowed to own shares directly, or are required to go through exceptionally painful compliance procedures every time they trade and make regular declarations of holdings.

      However, try fund raising for a start-up and going to potential investors to say that you’re not putting any of your own money into it because you’re already investing your time and effort and surely that’s enough ….

      • Novice says:

        Yh but you gotta hedge and spread out. For me, Investing rule 1: don’t have all your stuff in one basket because I’d rather have a small slices of million pies than own 1 pie that gets 🔥

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