United Utilities surprised the City yesterday by announcing a £1bn rights issue. The water and electricity supplier said it needed the money to finance its massive infrastructure investment programme, but some analysts suggested the cash would go towards supporting the company's high dividend.
It is the biggest UK rights issue since Kingfisher's £2bn cash call last year. The five-for-nine issue, at 330p a share, comes at a 43 per cent discount to Friday's closing price of 576p. United said it needed the cash to "keep pace with new European directives on water and waste water treatment" and to meet new "green" energy requirements. It will only pay about £10m in fees to advisers to the issue, given that, as with other heavily discounted share offerings, it will not be underwritten.
Utilities are regulated on five-year cycles. The company said it would need to invest at least £3.5bn for the next period, from 2005, on its regulated business, on top of capital expenditure of £1.9bn earmarked for the last two years of the current regulatory period.
Simon Batey, the finance director, said: "This is forward thinking. It's about the medium and long-term obligations. We need to put in place a structure to meet those."
United Utilities also applied yesterday to the regulator, Ofwat, for a price increase of about 4 per cent on water bills, for the 2004-05 year, the last year of the current period.
The company said it would continue to tap the debt markets it has some £3.4bn of bond debt but there was also "equity risk" within the business that would be serviced by yesterday's move. The group added that it had 18 months of "headroom" from bank facilities before more funds were needed, so it was acting now out of "prudence".
Ofwat seemed to welcome the news, saying there was "virtue in shareholder equity".
Some analysts had expected United Utilities to go for more debt financing and many were critical of the company's past and continuing dividend policy that sees the stock yield 8 or 9 per cent. United Utilities is committed to maintaining this unusually high yield until 2005, and thereafter its policy will be to "maximise" the dividend. The company said shareholders supported its generous dividend policy.
Andrew Wright, of UBS, said: "There was an unnecessary level of dividend payout. If the company had been more prudent in 2000, we may not be looking at a rights issue now at all, or be looking at a much smaller one or something much later."
Previous management set a high dividend policy in the 1990s but this was maintained by the current management, headed by the chief executive John Roberts, at the start of the current regulated period in 2000, when many other water groups cut dividends. Mr Wright estimated that if United Utilities had paid in line with the rest of the industry, it would have saved some £400m over the 2000-05 period.
Robert Miller-Bakewell, an analyst at Merrill Lynch, said the group needed to come up with a funding solution before it got bogged down in the new regulatory settlement. "The rights issue is a step forward but if it's a step far enough, we'll have to wait and see," he said.
Shareholders will be asked to subscribe to the issue in two parts, in September this year and June 2005. Its shares closed down 8 per cent at 532p.Reuse content