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Discounted shares aren’t always a bargain
Hundreds of companies this year have issued new shares at a discount to the market price in order to boost their balance sheets during the crisis. The majority of these fundraisings have been restricted to institutional investors such as asset managers and pension funds.
Whitbread is one of the few companies to undertake a rights issue, where all existing shareholders are given the right to buy more shares at a heavily discounted price. It is hoping to raise £1bn and shareholders need to act fast as the deadline is 9 June.
But perhaps the most important from a strategic perspective has been Compass’ £2bn share placing which enabled retail investors to get involved via a technology platform called PrimaryBid. Here investors only had a few hours to request shares with priority given to existing shareholders. Compass ended up raising £5.6m from this group and the rest from institutional investors.
PrimaryBid has historically been used for small cap stocks to raise cash but Compass’ involvement could send a signal to mid and large caps that it is an effective way for retail investors to get involved in placings and ultimately give them equal rights as institutions.
Being offered discounted shares is appealing but cheap isn’t necessarily good if the company has lots of hurdles to clear in the near term.
Whitbread is offering one new share at a 47% discount to the market price on 20 May for every two existing shares held which may seem an absolute bargain at first glance. However, the business has warned it could be ‘materially loss-making’ this financial year as lockdown has scuppered demand for its hotels and restaurants. It is burning through £80m cash a month while its sites are closed or operating at low occupancy.
An increase in remote working could see lower hotel demand in the future from business customers and it is hard to see lots of overseas tourists coming to the UK in 2020 and staying in its Premier Inn sites.
Greater levels of remote working would also be bad for Compass as its catering customers include many firms with big offices that they may downsize.
Such investment decisions would be easy to make if it was a simple case of a company needing cash to get through a short period of turmoil and life then returns to normal. But there is now a potential structural change in how we live and work which will impact so many different companies.
The pace of fundraisings is picking up as companies realise the disruption to their business could be longer-lasting than expected a few months ago. That suggests plenty of opportunities to buy more discounted shares soon, particularly if Compass’ use of PrimaryBid sets the precedent for a greater number of larger companies to include retail investors in their fundraising.
Just remember to weigh up the risks and don’t simply throw more cash at what could be a bad situation, just because the price is low.