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Investor groups and retail participation advocates have raised concerns over the large number of UK companies making use of a cashbox structure in recent share placements undertaken as a direct result of the ongoing Covid-19 pandemic.
Approximately 30 companies have raised cash in this way so far, with the expectation that there will be more to come. The transactions are highly efficient, taking around three days – often even less – and documentation-light.
Cashbox structures can be controversial, however, because they allow companies to skip an initial offering to existing shareholders – who in the UK have significant pre-emption rights. This could potentially exclude long-term stakeholders, and bypasses retail investors altogether.
One banker who has worked on a number of these transactions said that investors should be more concerned by the risk that the company does not survive the pandemic than their ability to participate.
"In times of crisis, being able to act quickly is the most valuable thing to shareholders"
“It’s a choice between a quick, easy to market deal that salvages some shareholder value and respects the vast majority of investors’ pre-emption rights, or one that’s hugely expensive, time-consuming, and exposes the company to significantly more market risk,” he said. “I’m not sure a rights issue with an eight-to-twelve-week timetable and all the ancillary costs that come with it is in the best interest of shareholders.”
Companies that have raised cash in this way include DFS Furniture, The Gym Group, estate agent Foxtons, Asos, and the Restaurant Group. “These are fundamentally sound, well-managed companies experiencing a Covid-19 disruption, resulting in medium-term liquidity and cash flow issues,” said James Roe, partner at Allen & Overy, who has advised on a number of the recent placings. “The success of these transactions is dependent on the company’s ability to articulate the other actions, including in respect of costs and borrowings, as well as the need for the equity injection.”
Under the UK Companies Act, existing shareholders typically have pre-emptive rights to buy up to 10% of an issuance: five percent for general corporate purposes, and five percent for special acquisitions or investments. Cashboxes fall outside of the statutory pre-emption rules because this structure sees investors paying the investment bank rather than the company, and the company receiving shares from the bank, rather than cash.
On April 1, the Pre-Emption Group (PEG) released guidance recommending that investors ‘consider supporting issuances of up to 20% on a case-by-case basis’ until the end of September.
|Inside the Informa deal|
The largest cashbox so far saw B2B events company Informa sell approximately £1 billion($1.24 billion) worth of share capital on April 16.
The Informa deal was different because the company only had authority to issue up to 10% of its existing equity without going to shareholders. Sources close to the deal believe there are around eight other UK companies with similar circumstances.
So lawyers came up with a structure whereby 9.997% of the offering was conducted on a T+2 basis, pursuant to the existing authority, while the remaining 9.9% is conditional upon shareholder approval – creating a tiered settlement of two tranches of shares.
That creates some settlement risk – but because the transaction was largely allocated to existing, long-term investors, “a couple of weeks delayed settlement wasn’t an issue for them”, a banker close to the deal said. It also priced at a discount.
The deal was also carefully calibrated to avoid the requirement for a prospectus on issuances of more than 20% of share capital: another significant time and cost-cutting measure that’s also retail exclusionary.All the companies to have come to market with this structure have followed broadly the same path: announcing cost control measures; obtaining covenant waivers, and in some cases, rebalancing debt, before seeking an equity injection.
There is some concern among investor groups and retail platforms.
“At the moment we are undergoing a great British recapitalisation at a massive discount, and retail is unable to participate,” said Anand Sambasivan, CEO of investment platform PrimaryBid, which connects retail investors with public companies. “Pre-emption rights are such an important part of UK capital markets that there are a lot of questions around how long this goes on for and how it’s dealt with.”
In a letter to FTSE350 companies in April, the Investment Association said ‘in exceptional circumstances a cashbox may be the only approach suitable for a company…shareholders would expect management to consider their views and not just be led by the views of its advisory banks’.
One retail investor who wished to remain anonymous added: “I have worked in the City all my career and the principle of equal shareholder rights has always trumped any other argument. It is not necessary to dilute on a massive scale one class of shareholders”.
“These companies are raising cash in a very specific context: to preserve value during an unprecedented pandemic and, ultimately, to survive,” said Roe. “Assuming this is the case for a company, then the capital-raising exercise is in the interest of all its stakeholders.”
Those close to these transactions maintain that the companies undertaking them truly are in the exceptional circumstances cited by the Investment Association. Their expectation is that other listed companies that have been affected by the pandemic in a different way will pursue different types of deals that preserve investors’ pre-emption rights.
“These deals can be controversial, but all the lawyers that do them have tested them to destruction and, especially since the last financial crisis, they are generally accepted, especially since the PEG’s guidance,” said a City-based lawyer who regularly advises companies on the structure. “I’ve not seen a case where one has been challenged.”
The key to the general acceptance of these transactions is the extraordinary circumstances so many companies find themselves in because of the coronavirus. In normal times it would more than likely be a different story – something TalkTalk learnt the hard way with its February 2018 cashbox placing.
Weeks after the EU Prospectus Regulation lifted the 10% cap on cashboxes bypassing pre-emption rights, TalkTalk issued 20% worth of its share capital via cashbox. The fallout was dramatic, with investor groups and the PEG issuing stark warnings – and even encouraging shareholders to oust the chairman. There has of course been no such dialogue in relation to the more recent deals.
Meanwhile, in January, Aston Martin opted for a combined share placement and rights issue, subject to shareholder approval – and with a prospectus. During the time it took to bring the deal together the world changed significantly, and by early April the company’s shares were trading below the subscription price – making the entire transaction potentially unviable. The company dropped its issue price from 207p to 30p when the deal closed on April 23.
“The Aston Martin deal shows that in times of crisis, being able to act quickly is by far the most valuable thing to shareholders,” said the banker.
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