The capital raisers

Written on the 14 September 2009

The capital raisers

Equity has replaced debt in recent times, particularly for those companies that have a ‘story to tell’. In the equity space, the Billabong story is one that investors do not get tired of listening to. Competitors perhaps, but not shareholders and certainly not consumers.

Despite downgrading profits this year by 13 per cent, the brand continues to thrive in new offshore markets outside of the Americas.
Billabong posted net FY profit of $152.8 million – down from $176.4 million on the corresponding FY 2007-08.

Its operating net profit, which excluded a non-cash impairment charge of $7.4 million, was $160.2 million, down 9.2 per cent. The operating result was at the bottom of the company’s guidance range for a profit between $160 million and $165 million.

Allens Arthur Robinson acted for the iconic Gold Coast surf retailer on a capital raising of $290 million as the company sought to break down debt. The 2-for-11 accelerated pro-rata, non-renounceable entitlement offer was launched at an offer price of $7.50 per share.

“There was a very strong interest by investors to subscribe in shares. It was not going to be problematic. We were offered much more than the $300 million raised,” says Alex Ding, of Allens’ equity capital markets practice group.

“After speaking to general counsel at Billabong, they advised that they needed a rights issued launched in a very short time frame. Due to the fact that we have done these before, we worked all weekend. Billabong had a broad idea of where they were going, but we had to guide the CFO and CEO. The reality is that the companies we work with are the ones we feel confident working with in a commercial sense.”

Billabong chairman Ted Kunkel, says shareholder response was positive.

“The proceeds from the entitlement offer will further improve Billabong’s balance sheet and provide greater flexibility for the company,” he said in a statement to the ASX.

Virgin Blue
One hour up the road at Virgin Blue in Brisbane, the airline has also raised $231 million. It completed the $112.1 million institutional component of its 1-for-1 non-renounceable entitlement offer as well as a $21 million institutional placement, both at 20c a share.
The airline says the institutional components were both ‘well oversubscribed’ with strong demand from new and existing local and international investors. It said about 96 per cent of shares were taken up by existing investors.

“We’re delighted by the strong support we have received for the offering by shareholders, as well as a new institutional investors,” said outgoing chief executive Brett Godfrey in a statement to the ASX.

Virgin will use the capital to improve its liquidity and financial flexibility. In conjunction with sale and leaseback of assets, it is expected to boost the airline’s cash reserves to about $675 million, or around 21 per cent of revenues.

The raising occurred as Godfrey went out on a wing and announced his resignation from the company towards the end of 2010. According to Alex Ding, Godfrey’s imminent departure did not compromise the raising.

“It wasn’t evident in the course of the transaction,” he says.
“(But) Virgin Blue had the added complication in that they are regulated as an airline and are restricted by the number of foreign shareholders they can have on the register.”

The airline’s board, which is also looking for a new chief commercial officer to replace Stefan Pichler, is expected to look both internally and externally for its new chief.

Outside the profile raisings achieved recently by ASX 300 companies, a raft of SMEs are now actively expanding and seeking to raise cash.

“The mindset has changed compared to two years ago. There has been a flood of equity, around $90 billion in 12 months, but it is difficult to get debt financing,” says Ding.

What’s the Gold Coast story?
Scott Standen, a corporate partner Hynes Lawyers, says Gold Coast companies are starting to enter the capital raising cauldron after erring on the side of caution over a difficult 12 months.
“The markets have been largely closed,” says Standen.

“Some of our small explorers have really struggled through this period. We’ve been noticing in recent times that the markets are becoming more receptive to equity raisings again. Throughout the year we have seen blockbuster raisings in the secondary mark with the big banks and Rio and Westfarmers.

“But we are now starting to see smaller companies raising equity. Some of their share purchase plans are becoming more successful.
“While we are seeing that improve, it still needs to backed by a good story that has business growth or cash generating business as opposed to a never-ending pit where the money is thrown into the ground or sucked up in losses. Equity at the moment is looking for cash-generating businesses.”

Standen is working on a number of transactions. Hynes recently advised an aggregation of mining service companies, the private Brisbane-based Diversified Mining Services.

“Debt has become particularly hard to come by,” concedes Standen.
“We recently worked on a transaction (Diversified Mining Services) where the debt financing was close to $30 million.

“It was the largest institutional customer for the NAB in 12 months. But it (debt) was very hard to come by. The hoops that the banks are making you jump through at the moment are quite extraordinary.
“The client had a very positive story to tell, but during that period there were other stories circulating where coal mines were laying off staff.”

Icon raise $20 million
Listed Gold Coast mining company Icon Energy executed a capital raising venture for a program worth around $20 million via a share purchase plan to significantly increase its coal seam gas (CSG) reserves. The company will look to increase its market cap to $300 million in 18 months – an increase of around $180 million. Icon is planning a further 30-40 wells in the Surat basin, on farming land to the north of Goondiwindi; in Roma, north Queensland; and in South Australia over the next 18 months.

CEO Ray James, told Gold Coast Business News that the CSG industry had been impervious to crashes in the market.

“This industry is not being dragged down by the global financial crisis, in fact we are expanding and going ahead,” says James, the major shareholder of Icon stock.

“The whole coal seam gas industry is a bit of an enigma at the moment and is one of the few industries that are moving ahead on the stock market in Australia. We are looking at trying to add some institutional investors to the register.”

Standen reiterates the confidence of investors in growth sectors and points to companies like Icon, which are on the cusp of major expansion.

“Icon Energy successfully raised capital and they have a fantastic story. Overcoming internal ruptures and to raise capital in this market is a great result,” he says.

“Other companies like Allied Brands seem to be going well also in the market and have good share prices.

“We are encouraging clients to look at this environment at one which you can go and grow the business and make strategic acquisitions at reasonable prices.”

Standen does not expect a triumphant return of the property industry in the short-term and developers without strong balance sheets will continue to topple. With the big banks calling in loans, capital for developers is scarce and projects mothballed.

“Property is struggling. Varsity Lakes has an awful lot of unoccupied product. It’s still going to be some months before we see a turnaround,” he says.

“There’s starting to bubble away a number of transactions under the surface. We haven’t seen a lot of them eventuate yet.”

IPO low
Just eight companies floated on the pubic equity market in Australia in the first half of 2009, raising $90.86 million between them, according to the latest IPO Watch update from HLB Mann Judd Corporate Finance.

This outcome represents an 84 per cent drop in the number of floats over the corresponding period in 2008 and 92 per cent for 2007.
Director of HLB Mann Judd Corporate Finance Geoff Webster, says the new 2009 issues to date have been small cap (under $100 million) companies.

“Although the number of companies raising funds through the public equity markets is the lowest by a massive margin since the IPO Watch started in 2005,” says Webster.

“The average amount raised by small cap companies so far this year exceeds both 2008 levels and more importantly, the pre-economic crisis average from 2007.”

Webster noted that the average amount of funds raised by small caps over the first half of 2009 was $11.36 million.

This compares to $7.45 million in 2008 and $8.75 million in 2007, before the global economic crisis hit.

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