Did Kerry Stokes and the Seven Group board blink in the wake of the huge surge in debt the company would be carrying after the purchase of the 53% of Coates Hire it doesn’t already own?
It certainly looks like it. From now mention of an issue to one being announced at 7.49pm to the ASX, Seven Group has had a major change of heart.
Seven Group shares ended up 10% yesterday, and it seems much of that rise was relief there would be no issue to help fund the $517 million Coates purchase (see separate story).
Seven Group said the purchase would be funded by existing cash and undrawn debt facilities of $982 million, plus the $540 million from the sale of its Chinese Caterpillar franchise.
There was no suggestion of an issue in yesterday’s release. All the statement said:
"The acquisition will be funded via existing debt facilities and available cash, including the proceeds from the sale of WesTrac China (expected in October) as previously announced will be in excess of $500 million. “
That would have made a total of $1.5 billion. The issue lifts that to around $1.9 billion, which will be reduced to around $1.4 billion once the deal is closed.
But clearly that was not enough to convince investors that Seven Group would have enough capital to support the $2.5 billion in debt and assuage bankers that the company had enough interest cover, especially in the event of another downturn in the industrial services (especially mining and construction) sector where more than 70% of the company’s revenue and profits will now come from.
So it would seem the company has agreed to the issue and Kerry Stokes, who controls Seven Group with more than 70% of the shares, won’t take part.
So last night Seven Group revealed a surprise $400 million share raising that Kerry Stokes will not participate in. As a result the company’s free float will rise from 26.4% to 34.6%, meaning Stokes stake will fall back to around 63%.
Some $375 million of the issue will be a placement made to institutions and sophisticated investors while a non underwritten share purchase plan looking to raise a further $25 million will be offered to retail shareholders.
The massive $2.5 billion debt of Seven Group and Coates Hire was the driver to the issue and as Seven group said last night the issue will reduce the ration of net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) from 3.8 times to 3.1 times.
As well Seven said the issue of new shares will increase the free float and “Provide capacity to support future portfolio enhancements following completion of the Coates Hire acquisition.”
The Placement will comprise the issue of approximately 33.5 million fully paid ordinary shares at an issue price of $11.20 to institutional and sophisticated investors in Australia and internationally to raise approximately $375 million. The new shares issued under the Placement will be issued pursuant to the Company’s 15% (meaning no approval is needed from shareholders).
The issue price of $11.20 represents an 8.8% discount to the closing price of $12.28 yesterday.
