Thursday, 14 May 2009

Debenhams: right time for a rights issue?

It is rumoured that Debenhams plc is working on plans to raise between GBP£300m and GBP£500m in a rights issue to cut its level of debt, which is believed to be around GBP£927m.

Fashionista recalls that it was thought, as reported in the Independent on Sunday, that a rights issue may be announced when the group delivered its full year results, but these plans were put on hold after its biggest shareholders failed to secure a deal with lenders.

According to the report in the Independent on Sunday, investors (including TPG, its biggest shareholder) were ready to support a rights issue despite what is perceived by some to be a weak shareholder base (with Baugur, Texas and CVC amongst its shareholders), who would perhaps be unwilling to participate in a rights issue given their own current challenges.

Rights issues are, increasingly in the current climate, becoming a method of rebuilding balance sheets strained by high levels of debt. Graham Secker of Morgan Stanley has been quoted in the Financial Times as saying that "companies that have underpeformed by 50% before a rights issue, and use the money raised to repair their balance sheets, nearly always outperform on a two-year view". Clearly, as the FT article goes on to say, "the backdrop is very different today. There are no green shoots of recovery – and, as news about the economy worsens, investors could be forgiven for remaining on the sidelines and hoarding cash". As the article further points out though "the big fund management houses and pension fund groups are prepared to back cash calls from companies that have solid underlying businesses".

Fashionista has been talking to those in the know to try and understand the ins and outs of rights issues. It essentially involves raising cash by offering new shares to existing shareholders in proportion to their existing holdings. The proceeds of a rights issue can be applied in numerous ways, most commonly to repay debt, provide working capital or to finance an acquisition. Companies Act and financial services legislation set out detailed procedures with which the offer has to comply, including the form of the offer and the length of time during which it may be accepted. Rights issues can therefore be fairly expensive and time consuming and there may therefore be a number of alternative methods of raising capital which Debenhams may consider if their current proposal does not get off the ground again.