Are UK rights issues growing not only in frequency but complexity? Observers may be forgiven for answering both affirmatively. There has been a veritable plethora of recently announced rights issues, leading investors and analysts alike to question just how much more the market can bear. Even if the market can bear more offerings, more bells and whistles are the order of the day, to judge from two recently announced issues, those by Wolseley PLC and Premier Foods PLC.  As other cash-hungry companies consider how to turn to the capital markets for financing, even the larger offerors must consider how much to dress their offerings up to attract investor attention all while respecting the pre-emptive rights enjoyed by their current shareholders.

As background, in the U.K., existing shareholders have the statutory right to maintain their proportional ownership in any new equity issuance. These pre-emptive rights are spelled out in the Companies Act. For most equity issues, these rights can be “dis-applied” by special resolution of shareholders at a general meeting. Companies seeking capital are forced to balance this need with any potential shareholder dilution, a concept that is usually an afterthought in most U.S. equity offerings. In most cases this results in a rights issue, usually discounted to create investor interest.  Further complicating things are requirements for an underwriter to agree to take up any rights that may have been declined by existing shareholders.

The result: rights issues are common, increasingly so in today’s cash-hungry environment.  In the quest to stand out to investor eyes among a crowded space for rights issues, this can sometimes lead to the need for attention-grabbing complex structures, as Wolseley has learned.  Like other companies struggling to strengthen their balance sheet in the midst of an ongoing credit crunch and economic deterioration, Wolseley has been forced to one of the last remaining options, the equity markets. Following a long list of other rights issue announcements, about £28 billion so far this year, Wolseley announced its intention to raise a total of £1 billion. Because of the previously announced rights issues, particularly the enormous HSBC rights issue of £12.5 billion, the largest to date in the U.K., Wolseley found itself struggling to line up sub-underwriters. It has been forced to proceed with a creative structure that includes issuing 225 million new shares, a one for 10 share consolidation and an 11 for 5 rights issue. This is to be done in conjunction with an overall restructuring that includes a €1 billion two year forward start debt facility from August 1, 2011 and conditioned upon the completion of the rights issue. The forward start facility will allow Wolesley to minimize any refinancing risks through the August 1 2011 period.

Wolseley’s woes, like many companies, started when the U.S. housing market deteriorated, and in Wolseley’s case the need for building materials went with it. As the downturn spread Wolseley also saw its U.K. and European markets subsequently weaken. It recently reported half year results that saw significant profit downturns and a before tax operating loss of £880 million. As part of its restructuring, Wolseley announced its intent to dispose of or exit the U.S. building materials business.

As Wolseley sought to line up investors to guarantee to take up any shares that were refused by existing shareholders it found little to no takers. This forced the somewhat novel structure now planned. The first part calls for a firm placing of 225 million new shares, reportedly with approximately 20 new investors. This will be followed by a share consolidation where shareholders will receive one new share for every ten shares they currently hold. Finally, a fully underwritten rights offer of eleven new ordinary shares for every five existing ordinary shares, for a nearly 50% discount price.

Wolseley is not alone in the need for more complex structures. A second rights issue of similar sort was recently announced by Premier Foods for £379 million, after expenses, through a dual structure. The first part involves a placing of 1.06 billion shares with an offer to buy back the shares on a five-for-four basis and the second a firm offering of nearly 500 million shares. Warburg Pincus has committed to take approximately 250 million shares which will give it a stake in Premier of over 10% with the possibility of that going to 20% if not all of the rights are taken up. Along with the offer Premier announced renegotiated agreements with its lenders, conditioned upon the successful equity offering, that will give it more covenant and liquidity room and reduce refinancing risk.

As the economic crisis continues more firms may find themselves stuck with increasing credit pressures requiring additional capital. Wolseley and Premier Foods were able to come up with workable solutions, but not with some difficulty and creativity. How much more can the equity markets absorb is anyone’s guess, but it does not appear to be getting easier.

Published: March 10, 2009