Are Tesco PLC And J Sainsbury plc Contemplating A Rights Issue?

tesco2With Tesco’s (LSE: TSCO) troubles mounting, City analysts and traders alike have begun to speculate that the company could be contemplating a rights issue. Idle chatter around the City suggests that the company will need to undertake a rights issue to bolster its balance sheet and fund day-to-day operations. 

As of yet Tesco’s management has kept quiet on the issue, and several analysts — with a more optimistic view on the company — have noted that Tesco still has plenty of financial firepower behind it, which the company can make use of before asking investors for cash. 

Assets for sale

Even though Tesco’s profits are falling, the company remains a fixture of the UK retail landscape and still owns many attractive assets that could fetch a good price if they were sold. For example, it has been revealed within the past few days that Tesco recently received an offer from TPG to buy Dunnhumby, its data analysis unit.

Dunnhumby is the business and brains behind the Tesco Clubcard scheme, which has given the retailer a head start over its peers in the past. It’s believed that Dunnhumby could be worth around £2bn as a standalone entity. 

Estimates suggest that Tesco requires around £3bn to maintain an investment grade credit rating, a highly desirable trait. So, a sale of Dunnhumby and other non-core assets could help Tesco return to stability.

Luckily, Tesco has plenty of cash available for the near-term. The grocer agreed a £2.5bn revolving credit facility with banks last month, giving management time to conduct any asset sales in an orderly fashion, without rushing things.  

Sector troubles

In addition to Tesco, which appears to have room to manoeuvre financially, the City is becoming worried about the financial situation of Tesco’s smaller peer, Sainsbury’s (LSE: SBRY).

Since Tesco’s £250m profit overstatement, many analysts and investors alike have started to question the way retailers account for profits. As a result, the sustainability of probability across the sector is now being questioned.

Unfortunately, this scrutiny has hurt Sainsbury’s prospects with analysts slashing Sainsbury’s full-year profit forecasts and the company’s predicted dividend payout. Analysts now believe that Sainsbury’s will be forced to cut its dividend by 35% this year as pre-tax profit falls 17%. 

However, Sainsbury’s management has stated that the company will not need to undertake a rights issue in the near-term. Sainsbury’s is currently undertaking a review of business strategy.

Looking for growth 

All in all, it looks as if Sainsbury’s and Tesco won’t be forced to undertake rights issues just yet but it’s not possible to tell what will happen in the long term.

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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.