Construction and infrastructure firm Kier Group (KIE) surprised a somnolent stock market on Friday afternoon by announcing a £264m rights issue.
The out-of the blue cash call has clearly caught investors on the hop, sending the share price tumbling 18% to 610p.
It seems the shorters called it right. As we explained recently, Kier had been the UK's most shorted stock with nearly 13% out on loan.
Part of the reason why the stock has crashed so hard is the steep discount of the offer. The company is issuing roughly 64.5m new shares at a price of 409p. That's 34% cheaper than a theoretical ex-rights closing price yesterday.
Shareholders representing 32% of the existing share capital have already committed to back the fund raise by subscribing for the new stock. But it could be argued that they have little choice. Large shareholders would struggle to offload substantial stakes in the market, while to hold existing stock without taking up the rights would mean substantial dilution of their stakes.
Against that backcloth, it is more understandable why its has taken a 34% discount to win shareholder backing.
The placing is fully underwritten by brokers Citi, HSBC, Numis and Peel Hunt and Spanish bank Santander.
BANKS PULLING BACK FROM LENDING
Kier’s reasoning for raising capital now makes for interesting reading. While its ‘future-proofing’ programme has had some success taking costs out of the business, its debt position is doing it no favours.
As the chief executive Haydn Mursell explains, ‘There has been a recent change in sentiment from the credit markets towards the UK construction sector, with various lenders indicating that they will be reducing their exposure to the sector.’
‘This has led to lower confidence among other stakeholders and an increased focus on balance sheet strength. The rights issue is intended to address these issues, better position Kier to continue to win new business and further strengthen our market leading positions.’
The £250m net proceeds of the placing will be used to accelerate the firm's debt reduction programme and get it to a net cash position by the end of June next year.
REASSURING FOR CUSTOMERS
This is key because after the collapse of Carillion and with interest rates going up, potential clients and customers are looking increasingly hard at their suppliers’ balance sheets as part of the procurement process.
Also having a stronger balance sheet means Kier can negotiate better deals with its own suppliers particularly when it comes to payment terms.
This won’t be much comfort to shareholders who have seen nearly 20% wiped off the value of their investment out of the blue today but in the long run it’s probably the right thing for Kier.
