Redstone bows to rebels and extends fund-raising plan with £4m rights issue

Redstone Telecom surrendered to rebel minority shareholders yesterday by agreeing to offer a larger slice of its fund-raising programme to existing small investors. Shareholders will now be able to buy additional shares through a £4m rights issue.

Dennis Carmedy, one of the rebel leaders, said: "What we have been able to achieve is not ideal but in the circumstances it was what we were realistically able to achieve. It is, as far as we know, the first time a group of private investors has been able to alter the terms of such an event: we suspect it will not be the last."

Redstone warned last month it needed to raise £25m or it would go bust and announced a placing and open offer. However, small shareholders complained that the exercise favoured institutional over private investors. The placing element, meant to raise £21m of the sum required, was only available to institutions.

The Redstone Action Group claimed to represent 26 per cent of shareholders – enough to block the financing proposal, which will be put to an extraordinary meeting next week.

Because of the scale of the original equity issue, representing 2 billion shares, at 1p a share – compared with the current total equity of 116 million shares – existing stockholders would have suffered massive dilution of their interest in the company. The existing shareholders of the company would have ended up with no more than 19 per cent of the group under the original plan.

Under the new proposal, an additional rights issue will be offered to existing shareholders, if the open offer is sufficiently oversubscribed. This could raise an additional £4m at 1p a share. Stephens Group, the US finance house that owns 10 per cent of Redstone, has agreed not to take up its entitlement in the rights and open offers. The interests of existing shareholders will still be diluted – they would own no more than 30 per cent after the fund-raising.

Ian Brown, the chief executive, said: "I don't think we got it wrong.... I conclude that we have a pretty supportive group of shareholders. After everything that's happened [in the sector] they are still willing to put their hands in their pockets."