Struggling under the burden of servicing high debts taken on to fund acquisitions made at the end of the boom times in 2007, and having cut its dividend, a large retailer needs to raise new equity. It does so quickly by placing a slug of shares with two cornerstone investors while simultaneously conducting a three-for-seven rights issue subscribed by existing institutional investors in a day and a half. Retail investors still have three weeks to decide whether to take up their rights at the indicated discount.
Successful completion of the deal allows the company to pay down nearly 30% of its debt and strengthens its hand in negotiations to refinance the remainder and extend maturities, enabling it to reduce principal in manageable stages stretching out to the end of 2012 instead of facing hefty maturity bulges in the next two years.
It sounds almost too good to be true, and is exactly the kind of deal companies in Europe dream of using to shore up their balance sheets and reduce leverage as slowing earnings make debt service more problematic.
You don’t have to live in dreamland to do such a deal: you just have to be the chief financial officer of a company in Australia.
Wesfarmers, Australia’s biggest retailer since its debt-funded acquisition of Coles in 2007, announced the A$2.8 billion ($1.85 billion) equity-raising on Thursday January 22 and had it all but completed on Monday January 26. It raised A$900 million from two mutual fund investors: Capital Research Global Investors, a new investor, and First Colonial State. The two paid A$14.25 a share for a combined 6.4% stake. Meanwhile an underwriting group, comprising ABN Amro, Deutsche Bank, Goldman Sachs, JPMorgan, Macquarie and UBS, circled up orders from existing institutional shareholders at A$13.50 a share, a 17% discount to the closing price before the deal was announced. The outcome was quick and favourable.
On the other side of the world, companies will be hoping that the equity capital markets might prove themselves equally accommodating to any whose decent operating earnings risk being consumed maintaining inappropriate capital structures that now need to be adjusted.
Even in countries where existing institutional shareholders jealously guard their entitlement to maintain their degree of ownership of a company’s earnings and not have this diluted by placement of new equity at low prices to new investors in a rescue, a new mood of pragmatism prevails. In the UK, the Association of British Insurers has doubled the proportion of capital a company can seek to raise without calling an EGM and supported the FSA’s shortening of the rights-issue timetable. More may be needed, especially a greater acceptance of the need to allow placement of a significant percentage of enlarged capital to new deep-pocketed investors, be they private equity or sovereign wealth funds.
UK investors expressed great bitterness last year when Barclays placed shares with investors from Qatar and Abu Dhabi – even though these same existing shareholders were not willing or able to invest the required new equity themselves.
There has already been one false start for a private equity fund seeking to invest alongside a rights issue when Texas Pacific briefly considered bailing out the struggling rights issue of UK mortgage bank Bradford & Bingley, which eventually collapsed into full-scale nationalization.
In the weeks ahead, retailer Premier Foods might seek shareholder approval for a concurrent rights issue and placement with new cornerstone investors. Others will hope to follow suit.
The nature of equity capital-raising in the UK and Europe must change and market participants sacrifice certain principles in the fight for companies to stay alive.
There has been much high-flown debate on this. Often it overlooks the sad but prosaic truth that the share registration, clearing and settlement infrastructure of the UK and certain continental European equity markets could not sustain the kind of speedy capital markets exercise that Wesfarmers undertook. This will require investment that market participants avoided spending their time on in the boom times.
It takes a crisis to underscore the benefits to society of an efficient market for capital-raising and the risks of its absence.
