Redstone fights for survival with desperate 1p-a-share equity issue

Click to follow

Redstone Telecom, which provides telecoms services to small and medium businesses, launched a rescue equity issue yesterday to raise £22m. The 1p-a-share offer price is at a discount of 99.9 per cent to the stock's £9.49 high at the top of the internet bubble last spring.

City analysts warned that the financial problems of Redstone, which was worth £1.1bn at its peak, could be a harbinger of trouble at other alternative telecoms suppliers.

The company said it was "hopeful" it could "effect an equity fund-raising of approximately £22m" to provide it with working capital. The fund raising is expected to be carried out through a placing and open offer of shares, although terms are still being hammered out.

Fear that Redstone will not manage to raise the money sent its shares down 43.48 per cent yesterday, or 2.5p, to 3.25p, their lowest point ever, valuing the business at £3.8m.

One analyst, who did not want to be named, said the business "just doesn't sound like a viable proposition. I can't see it has too many prospects, and if it does fail, I think one or two might follow it."

Redstone raised about £20m through its 120p-a-share flotation in October 1999, then staged a deeply discounted £122m rights issue last spring. That issue, on the basis of three new shares at 530p each for every 11 held, was carried out when Redstone stock was trading near its £9.49 high.

Just over a year later, Redstone is thought to have spent most of the cash raised on running its business and acquisitions. It paid £40m cash for Fastnet, a network service provider, in August but has also snapped up other businesses, including the DIALnet internet service provider for £15m.

Nevertheless, analysts were surprised at how quickly the money had gone, as they had expected Redstone to spend only about £30m this year. By the end of April, the company said just £14.7m in cash was left.

As a result, analysts estimate the £22m the company is now hoping to raise will not last long and that, if the planned rights issue is a success, Redstone will need to return to the market. They also suggestthe issue might cost the job of Graham Cove, Redstone's chief executive. Redstone is not forecast to turn a profit until 2002-03.

Redstone said yesterday that although there was "no certainty" current talks would lead to a "successful completion", it expected to announce the fund raising in detail alongside its results for the year ended 31 March "in the next few days".

Kevin Fogarty, an equities analyst at Teather & Greenwood, said: "Investment in infrastructure is clearly running well ahead of actually generating revenues off the back of it. If it was sufficiently self-funding at this stage, they would not need to come back to the market."

The company has not given investors a detailed update on its financial position since the end of February, when it released third-quarter figures.

Since then, it has also lost several key executives. In March, it announced the departures of John Carrington, non-executive chairman, Glyn Thomas, chief operating officer, and Bob Cushing, its strategy and business development director. In early May, Alan Harrold, the finance director, resigned. "Since Harrold went, there was a clamming-up, which raised a lot of suspicions," one analyst said.

In the nine months ended in December, Redstone had underlying losses of £12.2m, compared with losses of £4.9m in the same period the year before. Sales were £60.8m, up from £20.3m last year.