View from City Road: On the right track at Slough

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The Independent Online
Sir Nigel Mobbs, chairman and chief executive of Slough Estates, was disingenuous yesterday when he pointed out that the last conventional rights issue by the group was in 1959. Shareholders will remember being asked to cough up pounds 137.7m for convertible preference shares two years ago.

But since then gearing has risen from 56 to 90 per cent, and more than half the capital has disappeared in write-downs of trading properties and provisions against its 49 per cent stake in Bredero Properties, which is now in talks with its bankers.

In truth, the group would have had a conventional rights issue in 1991 had it thought the City would swallow it. But investors - rightly - sensed that the property market was about to collapse, and had to be bribed with an 11 per cent yield on the convertibles - a caution vindicated by the 30 per cent cut in the ordinary dividend to 8.1p a share last year.

Two years and a sterling devaluation later, investors believe that the property market is on the way up. The sector's shares have outperformed the market by more than 25 per cent since Black Wednesday, while Slough's shares have recovered from a low of 88p.

Helped by a generous 23 per cent discount to net assets, and a 6.75 per cent yield on the ordinary shares, its pounds 147.3m rights issue was welcomed yesterday with just a 2p drop in the shares to 193p.

Investors are betting that Slough's rights will be the first of many from the sector, with candidates ranging from British Land to Great Portland Estates. But those who think this money will be used to buy property, bidding up distressed prices, are likely to be disappointed.

Even after the rights, Slough's debt will be 58 per cent of shareholders' funds, giving it little room for manoeuvre, particularly if asset values continue to fall this year. And Sir Nigel admits that his first priority will be to develop and improve its existing portfolio. Even so, the rights should be taken up.