A billion dollar flop.
Fund managers were last unimpressed by Downer EDI’s (DOW) big share issue to fund its $1.3 billion hostile bid for Spotless, now it will be the turn of small shareholders to give it the thumbs down.
The big end of the market shunned the raising, leaving the underwriter, UBS with a near $300 million shortfall to fill and then get rid without putting further downward pressure on an already weak Downer share price.
Downer shares ended at $5.55 on Friday, a loss of more than 25% on the day after trading resumed following a two day halt to allow the funding raising from big investors to take place. The 25% fall is larger than the 20% discount offered to shareholders in the rights issue.
Downer was looking to raise just over $1 billion in a two-for-five rights issue priced at $5.95.
Not even that steep discount of 20% to its closing price last Monday could seduce all the company’s big investors into backing what some see as a dumb and badly flawed deal because of the problems inside Spotless (as its weak interim and big loss suggested).
After that two-day suspension, the institutional investor portion of the raising was short 44 million shares, meaning UBS has to outlay $264 million as sole underwriter to cover the gap.
Now it will be seeking $254 million from small shareholders, which will be a big ask given Friday’s big drop and the spate of adverse comments about the sense of the Spotless bid.
UBS could be in the hole for tens of millions more from the retail offer, meaning it will have funded more than 30% of the $1.01 billion to get it away.
UBS itself could lose more than $30 million from the deal according to some market estimates, although that will depend on how long it has to hold the unwanted to shares on its books and the cost of any eventual discount to get rid of them.
That will not go down well at head office in Switzerland.
Nor will it go down well among shareholders in Downer which has spent the past three years slowly rebuilding its credibility to the point where the shares hit seven year highs in recent weeks on upgrades and a solid 2016-17 interim earnings report and higher dividend.
Now that has been frittered away with a bid for Spotless, a services company that has been a serial underperformer in its public and private equity lives.
