Cash calls on shareholders were ten-a-penny a few years ago. Companies caught out with too much debt by the financial crisis and recession were desperate to shore up their balance sheets.
The economy may be growing again now, but are rescue fundraisings in the offing at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), Quindell (LSE: QPP) and IGas (LSE: IGAS).
Tesco
There was much speculation ahead of Tesco’s trading and strategy update last week about whether new chief executive Dave Lewis would bite the bullet and announce a rights issue to help shore up the company’s weakening balance sheet and preserve an investment grade credit rating. Veteran retail analyst Clive Black put the odds at close to 50–50.
In the event, no rights issue was announced. Lewis and finance director Alan Stewart made it clear they weren’t unduly concerned about a credit rating downgrade to ‘junk’ (Moody’s has subsequently done just that), and reiterated their stance that a rights issue comes below selective asset sales as a means to strengthen the balance sheet.
The noises from the directors, combined with a better-than-expected Christmas trading performance, suggest the odds of a rights issue have fallen markedly. I reckon that the better recent trading would have to prove to be a false dawn — and sales reverse back deeply into negative territory — for Tesco to ask shareholders to stump up cash.
Quindell
The investing world has long been divided about the viability of the ‘game-changing’ business model of insurance-industry hydra Quindell. The company, which has literally scores of subsidiaries, was put together in a whirlwind buy-to-build spree by founder Rob Terry.
There are serious questions about the value of many of the acquisitions and about cash flows. At the backend of last year Quindell’s joint broker Canaccord resigned, and Rob Terry and two of his trusted lieutenants stepped down from the Board after making share sales (initially dressed up as buys) via an obscure US stock-sale-and-repurchase outfit.
Shortly afterwards, Quindell’s stand-in chairman announced that PwC had been engaged to review, amongst other things, the company’s accounting policies and cash flow projections — which may take until the end of February to complete.
In the meantime, Quindell has this week announced a massive miss on its operating cash flow guidance of an inflow of £30m-£40m in Q4. The company is dependent on overdrafts with three banks; and, in a reversal of its buy-to-build strategy, is now looking to sell assets to raise cash.
No one knows how bad the situation at Quindell might be. What we do know is that Rob Terry — the architect of the empire and the person best placed to judge — was selling most, and very possibly all, of his shares at any price he could get, just before and just after the independent review by PwC was announced.
As such, I reckon there’s a high risk of goodwill writedowns, accounting policy revisions, and a rescue fundraising that will leave equity holders with little value — just as happened at Terry’s previous venture Innovation Group.
IGas
IGas, which listed on AIM five years ago, describes itself as a leader in onshore UK oil and gas exploration and production. The shares are currently trading at around 33p, valuing the company at a bit over £100m.
Highly-paid chief executive Andrew Austin is currently under fire over a deal with the same stock-sale-and-repurchase firm used by Quindell’s Rob Terry — but a bigger issue is looming for IGas shareholders.
Last month, IGas’s joint house broker Canaccord issued a note saying that “if the oil price were to stay around current levels for an extended period then the various covenants concerning the company’s bonds … may be tested” — notably, a liquidity covenant that requires IGas to maintain minimum cash of $15m.
The oil price was around $60 a barrel at the time Canaccord issued the note; it’s now nearer $45. If the oil price remains depressed, it looks highly likely that IGas will need to raise cash.
