View from City Road: Why so deep, Whessoe

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The Independent Online
THE STREAM of rights issues is fast becoming a flood. Whessoe, a maker of measuring instruments and pipes, wants pounds 14.3m partly to fund an acquisition.

It has offered pounds 21.8m for Autronica, a loss-making Norwegian manufacturer of monitoring equipment. The pounds 7.5m shortfall will be satisfied out of Whessoe's cash resources.

For Whessoe, which is sensibly shifting its focus from heavy engineering to electronics, the deal makes strategic sense. Autronica plunged into operating losses of pounds 461,000 in the eight months to 31 August but there is nothing wrong with buying into a promising turnaround situation.

While it is a good thing that Whessoe can present investors with definite plans for their cash, the plans are not cut and dried. The acquisition is not agreed with the Autronica board, Whessoe has left room for second thoughts, and in any event the Norwegian competition authorities will take six months to clear the deal.

It is disconcerting that Whessoe has not made the rights issue conditional on the successful purchase of Autronica. It suggests haste to secure a place in the rights queue.

George Duncan, Whessoe's chairman (and a non-executive director of Newspaper Publishing, owner of the Independent) and Chris Fleetwood, chief executive, appear relaxed about Autronica. But two details suggest a degree of caution that may, paradoxically, undermine shareholder confidence. Firstly Whessoe has taken an option to buy 57 per cent of Autronica - rather than making or agreeing an outright purchase. Secondly, the rights issue is pitched at 260p, a 17 per cent discount on yesterday's opening price of 314p. Why so deep a discount unless the management think existing shareholders will have trouble swallowing the proposals?

The fees are also worrying. Schroders merchant bank charges 2 per cent ( pounds 302,000) to underwrite the issue and the total cost including lawyers, accountants and printers is pounds 800,000 or 5.6 per cent of the pounds 14.3m proceeds. For a small company like Whessoe pounds 800,000 is a lot of money to spend on what may be an aborted acquisition.

Whessoe shares closed at 307p, above their ex-rights value of 301p, buoyed by a 4 per cent yield on the new shares. But there may be better opportunities in this rights round.

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