How will the dilution from the secondary offering affect existing shareholders' ownership percentages?
Answer
A secondary public offering—like the one that Centuri Holdings, Inc. (ticker CTRI) is completing through Southwest Gas Holdings—adds new shares to the market. Because the total number of shares outstanding rises, every existing shareholder’s slice of the pie (i.e., their ownership percentage) becomes a little smaller unless they also buy a portion of the new issue. Below is a step‑by‑step explanation of how that dilution works and what it means for current CTRI shareholders.
1. What a “secondary” offering actually does
| Before the offering | After the offering |
|---|---|
| • X million shares outstanding (the “base” shares) | • X + N million shares outstanding (base + newly issued shares) |
| • All existing shareholders own a proportion of X million | • All existing shareholders still own the same number of shares, but now those shares represent a smaller fraction of the larger total. |
The “N million” figure is the size of the under‑written secondary public offering that Centuri announced. The press release does not disclose the exact number, but the mechanics are the same regardless of the amount.
2. Quantifying the dilution (illustrative example)
Let’s assume, for illustration, that:
| Assumption | Value |
|---|---|
| Existing shares outstanding before the offering | 100 million |
| Shares being sold in the secondary offering | 20 million |
| Total shares after the offering | 120 million |
| Shareholder A | Before | After |
|---|---|---|
| Shares owned | 5 million | 5 million (unchanged) |
| Ownership % | 5 % (5 M / 100 M) | 4.17 % (5 M / 120 M) |
Result: Shareholder A’s ownership falls from 5 % to about 4.2 % – a ~16 % reduction in the percentage stake (5 % → 4.2 % is a 0.8‑percentage‑point drop, which is 0.8/5 = 16 % relative decline).
If the actual offering size is larger or smaller, the percentage change scales accordingly. The key point is that the absolute number of shares you hold does not change; the denominator (total shares) does.
3. Why dilution matters to existing shareholders
| Impact | Explanation |
|---|---|
| Voting power | Fewer percentage points mean a slightly weaker voice in shareholder votes (e.g., board elections, major corporate actions). |
| Earnings per share (EPS) | EPS is calculated as Net Income ÷ Shares Outstanding. Adding shares spreads the same earnings over more shares, so EPS will decline unless the company’s earnings grow enough to offset the increase. |
| Liquidity & market perception | A larger float can improve liquidity (tighter bid‑ask spreads) and may attract more institutional interest, but the market may initially price the stock lower to reflect the dilution. |
| Capital raising | The proceeds from the secondary offering are intended to fund Centuri’s growth initiatives (e.g., acquisitions, infrastructure expansion). If those initiatives generate higher future earnings, the long‑term value of each share could rise, partially or fully neutralizing the dilution effect. |
4. How existing shareholders can protect—or even improve—their stake
- Participate in the offering – Most under‑written secondary offerings give existing shareholders a “pre‑emptive right” to buy a proportionate amount of the new shares. If you purchase enough of the new issue, you can maintain your ownership percentage (or even increase it).
- Buy on the open market – If you cannot secure a pre‑emptive allocation, you can still buy the newly issued shares on the secondary market after they start trading, thereby offsetting the percentage loss.
- Hold for the long term – If the capital raised is used for high‑return projects, the total market value of the company may expand faster than the dilution, resulting in a net gain in the value of each share over time.
5. Bottom‑line take‑away for CTRI’s current shareholders
- Your share count stays the same; the ownership percentage shrinks because the total share pool expands by the amount of the secondary offering.
- The exact magnitude of the percentage drop depends on the size of the offering relative to the pre‑offering share base (the press release does not disclose the precise numbers, but the mechanics are as shown above).
- Dilution is not automatically “bad.” If Centuri uses the proceeds to accelerate growth, improve margins, or fund strategic acquisitions, the overall enterprise value could increase, offsetting the dilution and potentially delivering a higher per‑share price in the future.
- Existing shareholders who want to maintain their stake should consider exercising any pre‑emptive rights, buying the new shares on the market, or simply monitoring how the capital is deployed to assess the longer‑term upside.
TL;DR
The secondary public offering adds new shares, so each current CTRI shareholder’s ownership percentage will decline proportionally to the increase in total shares outstanding. The exact percentage drop depends on the size of the offering relative to the existing share base. While dilution reduces voting power and EPS in the short term, the cash raised can be used for growth that may ultimately increase the company’s value and offset the dilution impact. Existing shareholders can limit the effect by participating in the offering or buying the new shares on the market.