Numerous companies are raising cash to buy rivals or expand skills
Thursday 08 Oct 2020 Author: Daniel Coatsworth

Equity fundraisings are taking a different shape with the reasons behind asking shareholders for cash shifting more towards long-term strategic thinking, with the select few still seeking to shore up their balance sheet now coming across as desperate.

In March to May, the principle reason for companies issuing new shares was to raise money to strengthen their balance sheet. The cash helped to plug a hole from lost revenues and to provide options should the pandemic be prolonged into 2021.

Proactive management were wise to strengthen finances as it increasingly looks like the crisis is going to last for longer than people might have expected six months ago.

After a dip in activity in August, equity fundraisings are picking up pace again with £2.1 billion raised by 30 London-listed companies in September.

The reasons behind the latest fundraisings have diverged into two categories. Among the desperate souls, Rolls-Royce (RR.) has joined International Consolidated Airlines (IAG) in launching a multi-billion-pound rights issue. While both fundraisings are fully underwritten by various investment banks, meaning they are guaranteed to get all the money, the timing was odd.

For months both Rolls-Royce and International Consolidated Airlines were shrouded by speculation that they needed more cash, yet both seemed to twiddle their thumbs before pressing the button.

‘They both the left fundraisings late which looks the wrong decision now,’ says Oliver Brown, fund manager at MFM UK Primary Opportunities (B905T77). ‘They probably felt an equity raising would have been too dilutive to shareholders in March when the pandemic struck, so they took a wait and see approach. They’ve finally decided, or more probably shareholders told them, to raise money.’

By waiting so long, shares in both companies have fallen hard as investors speculated that the businesses were running out of luck. In Rolls-Royce’s case, its shares had slumped to 17-year low before the rights issue was launched.

In contrast, a growing number of companies are issuing shares to raise cash to help fund acquisitions. It suggests these management teams are feeling confident not only about the present but also about the ability to grow and take market share despite Covid-19.

Investors should sit up and take notice of these firms. It’s easy for a business to hide away in the current environment and just focus on keeping the usual day to day stuff going until conditions improve. To remain focused against all the background noise and have an eye on the longer prize is very positive.

Making strategic progress now arguably puts companies in a much greater position when the economy really does start to pick up. Names raising cash in recent weeks for  deals include Diploma (DPLM), TT Electronics (TTG) and Essentra (ESNT).

While there is always the risk a company overpays for an acquisition, or doesn’t integrate it well, in the current environment doing deals shows a company is able to navigate through the crisis and think about future value creation. This long-term approach is exactly how investors should think.

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