BA to seek up to pounds 500m through rights issue: Cash call set for next week to finance global expansion Fears over market's appetite for share placings

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The Independent Online
BRITISH AIRWAYS, which is due to announce its results on Tuesday, is set to launch a rights issue to raise up to pounds 500m next week.

The cash call on shareholders follows a steady rise in the airline's borrowings to finance an ambitious global expansion plan and fleet renewal programme.

BA refused to comment last night on rumours in the market of a rights issue. But sources close to the airline pointed out that Sir Colin Marshall, the BA chairman, commented earlier this year that the company's gearing, although acceptable, was nearing the top end of the range with which he was comfortable.

The rights will add to funding pressure on investors, following the launch of ICI's pounds 1.3bn rights issue last week and a pounds 400m rights from Royal Insurance.

There are fears in the City that institutional shareholders will not be able to underwrite many more big rights issues at one time without knocking share prices. They would need to sell shares they own to fund any more demands from companies.

BA has made a handful of acquisitions in the past year. In the past five months it has secured a 20 per cent stake in USAir for dollars 300m and bought a 25 per cent shareholding in the Australian carrier, Qantas, for pounds 311m. BA has also acquired large minority stakes in TAT, the French regional airline, for pounds 17m, Deutsche BA, and Air Russia. Earlier this week it paid pounds 6m to acquire control of Brymon Aviation, the loss-making carrier based in Plymouth.

Although it paid only pounds 1 for Davies & Newman, owner of Dan-Air, BA also took on its borrowings and incurred other costs. This contributed to a cash outflow of pounds 183m in the nine months to December.

BA also plans to exercise an option on dollars 86m of USAir stock, taking its total investment in the American airline to dollars 386m. BA is also planning to invest a further dollars 450m in USAir, regulatory authorities permitting, raising its shareholding to 43.7 per cent on a undiluted basis.

When it announced its results for the nine months to December 1992, BA said its gearing, expressed as debt to total capital, was 46 per cent. However, on the more familiar ratio of debt to shareholders' funds and including convertible capital bonds as debt rather than equity it stood at 140 per cent.

Clive Anderson of Smith New Court, the brokers, estimated in February that the ratio of net debt to shareholders' funds would rise to 250 per cent by the end of March, after taking account of BA's operating leases. This is unusually high for a UK company and would raise concerns for BA's financial strength.

News of the rights is understood to have emerged as advisers to the company sounded out large investors about their attitude to underwriting a BA cash call. There have been several other leaks about rights issues recently, notably about a cash call from Trafalgar House. Despite growing concern about leaks, advisers say it is difficult to launch a rights issue without sounding out investors first.

Merchant bankers and brokers are also able to find out if there are fund- raising exercises planned for a particular day by consulting the Bank of England, which runs an informal queueing system.

BA's price rose 4.5p yesterday to 303.5p, suggesting support for the rights issue.

The company has agreed to buy a further 76 planes and has options on 66. Its last accounts showed it had commitments to spend pounds 5.66bn, most of which was for Boeing 747-400 and Boeing 777 aircraft scheduled for delivery during the next 10 years.

The accounts said the company's cash and its funding facilities were sufficient to cover the cost of deliveries due within the next two years.

Earlier this month Virgin started its long-awaited legal action against BA over the dirty tricks affair. Sir Colin, who took over from Lord King as chairman, is expected to be subpoenaed.

The company is due to report the results of the latest valuation of its pension funds. This will show it remains in surplus, a spokesman said last week.

This will come as a relief to investors following this week's news of a pounds 750m shortfall in BT's pension fund.

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