Is Mothercare plc A Recovery Buy After Sliding On Cash Call?

MothercareShares in mother-and-baby ware retailer Mothercare (LSE: MTC) fell by 12% in early trading this morning, after the company said it would seek to raise £100m from shareholders through a rights issue.

Why is Mothercare raising cash?

Mothercare has looked desperately short of money for some time now, so today’s news isn’t a major surprise. After all, Mothercare has reported declining sales and a post-tax loss every year since 2012.

The main problems have been falling sales in Mothercare’s large UK store network and the group’s rising debt burden.

Overseas sales have been growing strongly and rose by 6.4% last year alone, but this hasn’t been enough to offset the UK decline.

How will the rights issue work?

In a rights issue, a company raises money by giving existing shareholders the chance to buy a certain number of new shares. This is calculated so that your shareholding — as a percentage of the firm’s total share count — remains unchanged.

In this case, Mothercare is proposing a 9 for 10 rights issue, at a price of 125p per new share. This means that shareholders will be able to buy nine new shares for every ten shares they already own.

The rights issue price of 125p per new share has been discounted by 34% in order to guarantee a good take-up — the undiscounted rights issue price would have been 189p per new share.

Shareholders who don’t take up their entitlement will be able to sell their rights, which I expect to be worth around 64p per share. This process is normally handled automatically, with the proceeds credited to your share account.

How will the cash be used?

Mothercare expects to raise £95m, after expenses. Of this, £25m will be used to accelerate UK store closures, by paying off store leases, while £20m will be used to fund store refurbishments.

Around £10m will be spent on updating the company’s outdated IT infrastructure, and introducing closer integration between stores, online and the firm’s warehouses. This should help to cut costs and boost sales.

The final £40m will be used to repay the majority of Mothercare’s net debt, which was £46.5m at the end of March.

Buy Mothercare?

In my view, today’s news could be good for Mothercare shareholders, as it may enable the firm to return its core UK business to profitability and restart dividend payments.

I rate Mothercare as a cautious buy, as I believe the firm’s underlying business and brand are sound.

However, there's no doubt that Mothercare's turnaround still has a long way to go.

Investors seeking more immediate profit opportunities might want to take a look at "Where We Think The Smart Money Is Headed" before deciding whether to hit the 'buy' button on this troubled retailer.

This exclusive wealth report contains information about three brand-new opportunities from the Motley Fool's market-beating Share Advisor team, whose tips have risen by an average of 23.8% since February 2012.

To receive your FREE, no-obligation copy today, simply click here now.

Roland does not own shares in Mothercare.