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Scrambling for Cash? Cut Out the Middle Man

Chris Hughes

(Bloomberg Opinion) -- The scramble to replace vanishing revenue is forcing businesses to take extreme measures. In the U.K, a firm recently broke the revered convention that a company shouldn’t dilute its shareholders by hurriedly selling a massive stake in itself in the open market. It saved on bankers, lawyers, time and paperwork. One week on, this maverick approach has gained official acceptance.

Normally a big corporate share sale is about cutting debt or paying for a big takeover. There’s plenty of time to do this properly via a so-called rights offer: the lengthy process whereby investors get priority allocation on any new stock being sold (hence the “rights”). 

Today’s need for equity is different. Many companies suddenly have zero cash coming in due to measures aimed at combating the coronavirus. Their lenders may not help unless shareholders dig deep too. There’s no time to lose.

The solution that’s emerged is to flout British custom and follow U.S. practice instead: Just sell a big slab of shares, ideally to existing shareholders, but ultimately to whomever will take them. After all, anti-dilution protection is not enshrined in U.K. law but in guidance stating that share sales of more than 10% of the company should essentially be via rights offers. That guidance was sensibly revised on Wednesday, with the threshold lifted to 20% over the next six months. Bosses will need to explain why they’re forgoing a rights offer and still try hard to raise the equity from existing owners.

Airport caterer SSP Group Plc blazed the trail last week and sold a 20% stake in the market for 216 million pounds ($268 million). HSBC Holdings Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc simultaneously agreed to lend it 113 million pounds. Each slab of cash appeared to rely on the other being committed.

Sticking with the old guidance was not a realistic option. Investment banks could have agreed to underwrite a “standby” rights offer at a price so low it would have wiped out existing shareholders, for a tidy fee. With that backstop secured, an orderly fundraising might have been possible, for another fee. But SSP’s share price would have subsequently tumbled, and the proceeds would have taken weeks to land. Lenders could have then charged the earth for bridging the financing gap.

Why ever bother with a rights offer if you can just do what SSP did? Should nimble share placings become the norm? One argument against this is that small shareholders still get diluted. However in this case, they actually did OK: SSP shares rallied. The institutional shareholders who bought the deal paid a premium to SSP’s prior-day share price; there was no VIP bargain. Moreover, speedy share placings could also be made subject to clawback by smaller holders, with some tweaks to the current documentation requirements.

The real problem is many firms will need to raise even more than 20% of their share capital this year. Share offerings that big require a chunky prospectus anyway under European regulations. And at that size, the case for ignoring anti-dilution rights is weaker.

Shareholders know multiple demands for cash are looming. Companies should form an orderly queue, ask for no more and no less than they need, and choose their methods accordingly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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