But the Premier Inn owner’s £1bn rights issue wrongfooted analysts and investors with its timing and size, and offered a noticeable contrast with the placing announced by catering group a day earlier.
Compass got its £2bn placing away yesterday, including a small £1mln slice available for retail investors via the PrimaryBid platform, at a price of 1,025p.
The price of the caterer’s fundraising was said by the company to be at a 3.3% discount to the mid-price when the fundraising was agreed, but is actually a 28% discount the highest price of the shares over the past month and 46% lower than the price at the start of the year.
Hotelier Whitbread launched its own fundraising today at half the size and in the form of a 1-for-2 rights issue, meaning existing shareholders can buy one share for every two they own, at a price at 1,500p per new share, which is a discount of 37.4% to the theoretical ex-rights price of 2,395p but also around 50% of the highest share price in recent weeks and a 69% discount to the level at the start of the year.
The announcement was a surprise, said Richard Hunter, head of markets at Interactive Investor, “and has wrongfooted investors”.
What confounded analyst Greg Johnson at Shore Capital and others more was that Whitbread was issuing this amount of money and at such a discount “from a position of relative strength”.
“We struggle with the magnitude of the equity raise and its dilution given the low starting debt position, liquidity and the resultant dilution,” he said.
With Whitbread’s balance sheet in reasonably good shape, the move highlights just how much pressure the leisure sector is under, said Emilie Stevens at Hargreaves Lansdown.
While profit warnings and dividend cancellations have become almost de rigueur during the corona-crisis, Hunter said a rights issue is rather different.
“Traditionally seen as a call for financial help in a distressed situation, the additional surprise in Whitbread’s case is that there had been no obvious signs.”
Net debt at the end of February was just £323mln, after returning a hefty part of its US$5bn Costa Coffee sale to shareholders last year and acquiring a bunch of hotels properties in Germany this year, with roughly £300mln cash at hand as last Friday, plus undrawn headroom of £900mln in its revolving credit facility and access to the Bank of England‘s Covid Corporate Financing Facility up to £600mln.
While the company has now guided for around £600mln of cash burn in the first half of the current year, assuming properties remain closed or at low occupancy because of Covid-19, this would mean net debt at the half year stage would be expected to be around £900-1,000mln and still leave ample liquidity.
“A reduction in capital expenditure, the suspension of the dividend and a boost from the government in terms of business rates relief and other financing facilities, may well have been sufficient to see the group through, subject to the length of the current and inevitable deep recession,” Hunter said.
Thrive versus survive
Whitbread seemed to see the situation from a different angle, or at least was painting that picture for investors.
“Quite apart from boosting liquidity, the rights issue provides the opportunity for a land grab, as some competitors, especially smaller ones, are unable to cope with the virtually entire removal of income in the shorter term and go to the wall,” said Hunter.
For Ivor Jones at broker Peel Hunt, Whitbread had adequate liquidity to trade through Covid-19 but the rights issues “is a case of the company being determined to thrive rather than merely survive”.
Noting that Whitbread was highly unusual among hotel companies nowadays in owning and operating assets rather than via the popular franchise model.
“While other hotel companies are trying to shepherd their hotel owners towards government aid packages, Whitbread is able to make central decisions about cost control and financing to protect its business.
“In terms of the recovery, it should be able to act decisively in acquiring and leasing new sites (particularly now it will have much better credit), while other hotel companies are looking around for hotel owners to support expansion, who may be licking their wounds post Covid-19 and disinclined to expand.
“This raise should allow the re-equitised company to behave in a truly counter-cyclical way,” Jones added, noting that the tone of the hotelier’s announcement was stridently optimistic despite the losses predicted for the coming months.
Indeed, the hotelier’s management states their aim to “ensure that Whitbread emerges from the Covid-19 pandemic in the strongest possible position to take advantage of its long-term structural growth opportunities and win market share”, saying that “financial strength is a source of competitive advantage to the group” by allowing it to take a long-term investment view and helping secure sites for new hotels on favourable terms.
Jones also noted an oblique reference by Whitbread to the challenges for Travelodge in the statement that the rights issue is “to support continued investment in Whitbread’s strategy whilst its budget-branded and independent competitors are expected to be weakened by the Covid-19 pandemic”.
The contrasting terms of the fundraisings is partly down to the vastly different size of the companies, with Compass’s placing only around 12% of its £18bn equity base versus near a quarter for Whitbread, which has seen its market cap fall below £4bn.
Furthermore, Compass was less bullish with its rhetoric, saying the funds will enable it “to invest in the business to support long term growth, ensuring it is well positioned for the eventual recovery”.
Compass, said Russ Mould, investment director at AJ Bell, “could probably have withstood a fair while longer in the pressure cooker of the coronavirus crisis without going cap in hand to shareholders.
“However the fundraise should reinforce its credentials as a survivor in its market and one with the capacity to invest for recovery and to take advantage of M&A opportunities as and when they arise.”
The share price discounts and the rhetoric may make it extra difficult for investors to decide which, if either, of the shares is the best prospect – though Whitbread has already persuaded its banks, which have fully underwritten the issue and extended its lending covenants until 2022.
“The size and scale of Whitbread’s rights issue are a surprise to shareholders but they seem to be coping with the surprise fairly well,” said Mould, with the shares trading above what he said was a theoretical ex-rights price of 2,395p.
“That suggests investors are buying into the strategy outlined by Whitbread’s management.”
He said the discount price was “probably reflects management’s awareness of how the fundraising would be a surprise, given previous assertions that the firm had plenty of liquidity, and its size”.
“To make the deal sufficiently attractive, the board presumably felt they had to offer an attractive price to compensate investors for the risks involved – and the risks remain considerable, in the form of the current deep downturn, the duration of which is impossible to guess, and then whether the strategy of further expansion in Germany and at home works out.”