Derek Pain: Are cash-strapped firms rights on the money?
No Pain, No Gain
Saturday 27 June 2009
Quoted companies are stumbling over themselves to pull in cash from shareholders. The stampede to announce rights issues or placings could be regarded as the most significant indication yet that the stock market has, in fact, turned the corner. On the other hand, the more cynical among us will no doubt claim that over-borrowed, cash-strapped businesses are tapping investors while a soon-to-close window of opportunity still exists.
In the main it is the large groups that have adopted the rights issue approach. Many placings, but by no means all, are the product of smaller fry. Since banking giant HSBC launched the current pursuit of shareholder cash in early March with a blockbuster £12.5bn rights, similar, although smaller, exercises have emerged with increasing regularity. Cash calls have exceeded £50bn since HSBC set the money rolling.
Over a few days last week, three blue chips produced begging bowls. Engineer GKN and brewer Marston's sought £423m and £176m respectively through traditional rights issues. Punch Taverns called for £375m, half through a rights with the rest already in the bag via a placing among privileged institutions.
I suppose Punch deserves some credit for giving shareholders the right to subscribe for some of the shares. Too often, small shareholders are excluded completely from cash-raising exercises with just a fashionable minority selected to take up placed shares. I believe such exercises are undemocratic. All shareholders should be offered the chance to subscribe for new shares – not just a few.
It took a long time before all – or, at least, most – shareholders were accorded equal treatment in the stock market. For years special voting and non-voting shares allowed small groups to exercise control. Interlocking shareholdings, giving quoted companies blocking stakes in each other, were also evident.
Two forerunners of Trinity Mirror, the newspaper group, indulged in such a conspiratorial attempt to retain independence. Whitbread was one blue chip to shelter behind a two-tier structure before opting for one vote, one share in the early 1990s. But a handful of companies still embrace uneven voting shares. One defence is that a buying investor must know he has picked a disadvantage share.
The habit of raising cash through placings to selected organisations and individuals is, I believe, a disservice to other shareholders and encroaches on the alleged policy that all should be treated equally. I realise that a placing is cheap and quick. But the cost, unless a company is strapped for cash, should be an irrelevance. And the speed element only comes into play if money is needed urgently.
Many companies attempt to avoid the obligation to use the rights process by putting forward special resolutions at yearly meetings. With City institutions happy to oblige there is rarely any objection. Of course, it is foolish to pretend that small shareholders will, in every respect, be treated the same as big players. In almost every walk of life the top echelon gets a better deal but, in such regulated areas as cash calls, the small shareholder should enjoy the same respect as a major institution. The authorities should ensure they do.
Marston's is a candidate for the no pain, no gain portfolio. I have been pondering over the brewer and pub owner for some time. When the shares approached 200p, I feared I had missed the boat. But the price, as I write, is around 112p. I could be tempted.
The rights shares are heavily discounted – 11 for ten at 59p. Unlike others, Marston's is not giving high priority to reducing its debt pile; it wants the cash mainly for expansion. Clearly it believes its borrowings are tolerable.
There is much concern these days about pub closures, but Marston's has done a little to redress the balance by opening 50 in the past five years; it is looking to build up to 25 a year with the rights cash.
The group talks about its "F" plan with new pubs focussed on food, families, females and 40/50-somethings.
One casualty of the call is likely to be Marston's standing as a high-income stock. It has been quite lavish with dividend payments, even increasing last year's distribution when a cut was expected. And it recently held its interim payment. Still, there is no point paying rights cash out as dividends.
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