Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

What’s Spooking the Commercial Property Market?

There was an interesting article in the Financial Times yesterday (12/2/2016) by Vanessa Houlder on the possibility that deduction of interest costs against profits will be disallowed by the Chancellor in his next budget. Is this is what has recently spooked the commercial property market? The British Land share price is down 25% since last November, Land Securities is down a similar percentage, and even well diversified property investment trusts such as TR Property are down 16%. Surely property companies should have been more resistant than most companies to the general decline in share prices being seen as somewhat defensive (even boring) income stocks? They have long term relatively stable income and are likely to be less affected by declines in commodity prices than many businesses.

According to the FT article, it is possible the Chancellor will not allow interest costs in excess of 30% of EBITDA to be allowed against corporation tax. Potentially this could affect any companies that are highly geared or have large assets which are financed via debt. For example utility companies are often in that position although it is suggested there may be exemptions for those companies developing infrastructure for the public good.

Is this simply an attack on private equity companies and the way they evade tax? Such companies often acquire businesses and then load them up with debt. The interest on that debt often wipes out the profits. If the lender is located overseas in a low tax environment then the profits and potential tax thereon also disappear overseas. This might be seen as another attack on “hedge funds” and “asset strippers” so could be just another populist attack on their activities, but there is also surely some merit in regulating the avoidance of UK tax in this way.

As regards property companies, they also tend to rely on large amounts of debt finance. Indeed as interest rates have fallen, all companies have tended to expand via debt finance rather than issuing equity. This writer has been somewhat wary of property companies in the past, particularly smaller ones. The business model of their management seemed to be: set up the business, borrow as much as you can from any foolhardy bankers; if the assets grow in value on what is in essence a geared play then all is well and you look a hero; if the assets fall and you come unstuck then you default and it becomes the banks problem and you move on to the next proposition. In other words it a gamble using the lenders money.

Would listed property companies be vulnerable to such a restriction on corporation tax deductions? I took a look at British Land and Segro (formerly Slough Estates). British Land is actually not particularly highly geared (loan to value about 35%), and the percentage of EBITDA represented by interest costs is less than 10%. At Segro it is somewhat higher at 21%, but even so a limit of 30% would not cause any problem.

So why have the share prices of large property REITS fallen so far and so rapidly of late? This seems to be a feeling that the money that has flowed into property in recent years from overseas may be going the other way. But it seems more to be a slowdown in new investment in commercial property than a withdrawal. Also British Land and Land Securities have a heavy focus on London and the South-East where property of all kinds is now looking highly valued. For similar reasons the share price of house builder Berkeley Group has fallen back. It also seems possible that there is some contagion from the fact that lots of FTSE-100 stocks have been falling, so anything in that index might be suffering. In addition London office rentals might have declined as companies have become nervous about the future although the firm evidence for this seems scarce.

But it does seem unlikely that any change in deductibility of interest will badly affect property companies, or be the cause of recent share price declines in such companies.

Roger Lawson