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Rights issues: From trickle to torrent?

Wouldn’t be surprising, given the disconnect between generally grim operational conditions and comparatively strong share prices.
Even companies that feel comfortable today may be seeing stretched balance sheets in the coming months and thinking 'Let’s sell shares’. Image: Moneyweb

With the impact of the Covid-19 lockdown expected to drag on for several more months, the rate at which companies tap the market for more funding is likely to increase appreciably from the steady but significant trickle seen so far.

The first to put their hand up was the comparatively cash-flush – or at least debt-free – Mr Price, which announced back in May that it was planning a capital raise of up to 10% of its current shares in issue. That amounts to 25.7 million shares and, at around its current share price, would raise about R3.6 billion.

To be expected from a company that is in a reasonably comfortable state, all things considered, Mr Price is keeping its options open. The company said in May that the share issue will be done “at an appropriate point in time and as market conditions permit.”

Transaction Capital has already bagged its share issue – using a book build to place an additional 5% of shares, with select investors at R18.20 a piece bringing in gross proceeds of R559.7 million. That’s not too shabby a placement price, given all that’s going on right now and probably highlights one of the advantages of getting in ahead of the crowd.

Sun International was up next, stunning analysts late last week with news of a rights issue that is likely to see well over 30% new shares.

The severely cash-strapped company is hoping to raise an additional R1.5 billion, which looks like a stretch given that its current market capitalisation is just R1.9 billion. Remarkably, the share price shot up from around R12 to just over R17 in the days after news of the pending rights issue.

TFG and Curro join the list

On Thursday Curro and The Foschini Group (TFG) announced their respective intentions to raise additional funding through rights offers.

TFG is targeting gross proceeds of up to R3.95 billion, which could mean up to 25% more shares if the issue is pitched at around the current price of R73. Again, the share price moved up – almost 6% – in the hours following the announcement.

Read:
TFG is raising capital
TFG in talks on R2.5bn loan, cuts capex forecast

The market didn’t respond quite as enthusiastically to Curro’s announcement that it was issuing 185.9 million shares at R8.07, which represented a discount of approximately 10% on the 30-day weighted average traded share price.

Controlling shareholder PSG is taking up its 55% allocation and has agreed to underwrite an additional 39.55 million shares (or 21%), so 76% in total. The share price closed 5.56% weaker at R8.50 on Thursday, as investors contemplated the prospect of 41% more shares in issue.

Read: Aside from Capitec unbundling, what is PSG scheming?

SmallTalk analyst Anthony Clark may have captured the mood of the market when he wrote in a note issued within hours of the Sens statement: “The unkind (may) say that the underwrite pin is just a cheap way of PSG increasing its control and ownership of Curro on the cheap rather than making a minority offer, should minority shareholders in distressed Covid-19 South Africa be unwilling or unable to stump up more cash into Curro.”

Clark says the market’s surprise is understandable, given that as recently as February Curro management said there was no need to have yet another (the sixth since listing in 2011) equity raise “unless a great deal came along”.

The Sens statement refers to the desire for capital comfort and having cash ready for any opportunities that might come up. Clark is not persuaded: “One must ponder if the Covid-19 schools closure and concerns over the private education market has led to this sudden rush to get cash in now.”

Unsurprising

Jean Pierre Verster of Protea Capital Management says the rights issues are unsurprising, given the speed at which asset prices have recovered across the globe. He describes the disconnect that exists between the generally grim operational conditions management teams are seeing and their comparatively strong share prices.

“’Let’s sell shares’ is the appropriate response,” says Verster, who believes even companies that are feeling comfortable enough today may be looking forward a few months and seeing stretched balance sheets. It then becomes an issue of whether you come to the market ahead of your competitors; after all, shareholders don’t have infinite resources.

“Mr Price and TFG have announced their intentions, what happens if Truworths decides to approach its shareholders?” asks Verster.

Or Woolworths, which has just committed R1 billion to David Jones in Australia?

The process

Significantly, none of the proposed rights issues will involve use of the JSE’s recent exemption, designed to speed up the process. The exemption allows companies to get written approval from shareholders for a rights issue resolution instead of having to hold a meeting.

Read: JSE eases restrictions on issuing shares for cash

All of the companies looking for additional funding (with the exception of Transaction Capital’s private placement) have indicated they will be holding virtual meetings.

Also evident is that the approval process could be completed within a matter of weeks.

To date only former Investec CEO Stephen Koseff and Kevin Latter, senior country officer for sub-Saharan Africa at JP Morgan, have publicly indicated support for an almost complete relaxation of shareholders’ power to control management’s ability to issue shares.

While most of the large institutional investors are anticipating more calls for cash, none of those approached by Moneyweb wanted to see a relaxation in shareholder oversight of the process.

Head of investment at Coronation Fund Managers, Karl Leinberger, says the status quo does a decent job of what is always going to be a tricky balancing act.

“We do not feel that shareholder approval slows the process down unreasonably. We also think that capital raises should preferably be done through formal rights issues. This allows smaller shareholders to participate. Accelerated book builds typically preclude them and they end up suffering undue dilution,” Leinberger told Moneyweb.

Andrew Lapping, chief investment officer at Allan Gray, said the restrictions imposed by local regulations have been positive for the market.

And head of ESG Engagement at Old Mutual Investment Group Rob Lewenson said it would always expect shareholder oversight of a company’s capital requirements by way of a company meeting.

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Rights issues: From trickle to torrent?

Why keep the risk when you have blown away your cash, spread it wider.

So, the investors who already have a stake in one of the companies, mostly who are not paying any dividends on the investment you have, in some cases have never paid a divided, which the share prices are depressed below what one paid for them, now expect those loser investors to put more money into the pot where the executives of the companies have control to use the additional money as they like which will include a generous fee for themselves. Then, no doubt, when the financials are due in the future, no dividends will be paid and the share price depresses further. Curro is a perfect example of this.

Curro has been a strange darling of some. Fundamental knowledge of knowing what it costs to run a school should tell one it is a marginal business.

Maybe like healthcare and security etc, its best advertisement is how useless government is.

A rights issue is just a “margin call” in disguise. You pay to stay in the same position as you were. Although it is voluntary, you will get punished by being diluted it you don’t take it up. So, what caused the margin call? Well, the margin call was caused by the actions of a hopelessly inept Central Command Centre that killed the economy with severe lockdown measures.

This margin call will trickle down right through the economy, all the way from the highly sophisticated investor down to the Mamma in her shack who have to feed 6 children on a social grant.

End of comments.

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