View from City Road: Burton rights dilemma

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The Independent Online
EIGHTEEN months after they were last approached for money, Burton Group's 54,000 shareholders are again faced with the dilemma of whether to invest more in the retail group. Those who took the plunge last time have seen their investment more than double. That rights issue, for pounds 161m, was an emergency cash call. This one, for pounds 163m, is a more relaxed affair. It will reduce gearing and speed refurbishment of the stores, some of which have not seen a lick of paint for 10 years.

Shareholders are being offered one new share at 60p for every four they own. With the shares at 70 1/2 p, those declining the offer, which closes on Friday, and selling their rights look set to receive 10p a share.

Burton is a play on the expected recovery in consumer spending. With almost 12 per cent of the UK clothing market - spread across 10 facias and 1,500 shops - it cannot fail to benefit if high streets get busier. By the same token it will find it tough to buck the trend if recovery is slow.

It is getting to grips with its costs. The redundancies announced last month should wipe pounds 25m- pounds 30m from the wages bill in a full year. Recent figures show sales up a healthy 14 per cent, but there was a worrying 2 1/2 per cent fall in the gross margin.

Much of the expected recovery is already in the share price. The shares trade on an ambitious 39 times expected earnings this year and 20 times next. There is one other reason for caution. Sterling's 30 per cent decline since last August has not yet had much impact because of Burton's long lead times. But it will increasingly put Burton at a disadvantage beside stores that source more in the UK - notably its arch-rival Marks & Spencer. Pass on the rights.