Well played, Kier Group. It is one of the few companies that can say it got value for money from the banks and brokers who underwrote its rights issue.
Put another way, the construction firm’s £264m fundraising was a spectacular flop. Only 38% of shareholders wanted to buy the new shares, and most of those investors were on the hook, morally speaking, after promising to cough up at the end of last month. Kier still gets its full slug of cash, though, because the rights issue was underwritten. Thus the pain fell on Numis, Peel Hunt, Citigroup, HSBC and Banco Santander, which had to pay 409p a pop for unwanted shares that fetched as little as 360p in the market on Thursday, before closing at 391p.
One response is to cheer a rare example of underwriters having to shoulder risks that turned out to be real. Approximately 99% of the time, underwriting is money for old rope because the new shares are priced at huge discounts to the existing ones. But the other reaction also matters: what the hell happened? In theory, the 34% discount in Kier’s case should have been more than enough to spare the underwriters’ wallets.
It’s too easy to blame the weak general state of stock markets. Trade wars, the arrest of the Huawei finance director and the US Federal Reserve’s stance on interest rates didn’t help, obviously. It’s also true that the spectre of Carillion haunts the construction and contracting sector. But the latter factor, at least, should have been in the price at the outset. The extra ingredient, one suspects, is simply Brexit. It is where the outlook has definitely changed in the 21 days since Kier announced its plans. Westminster is a shambles.
Brexit uncertainties have “intensified considerably” over the past month, said the Bank of England on Thursday, a statement supported by the report from its on-the-ground agents. “The availability of credit and trade credit insurance continued to tighten” in three sectors – construction, procurement and consumer-facing businesses – said the report. Some banks “were asking more detailed questions about the anticipated impact of Brexit,” it added. It would not be surprising if Kier’s owners had been infected by the bankers’ caution.
Kier’s board can claim vindication, it if wishes. The arrival of tighter credit conditions was precisely the reason it gave for wanting to raise money. The balance sheet probably should have been less burdened with debt in the first place, but at least the company acted in time. One sticky rights issue doesn’t matter in itself, but the wider moral is not good. Appetite for risk is fading, and the Brexit squeeze is happening.
Rose-tinted statistics?
Who are you going believe, the Office for National Statistics or Mike Ashley?
“Retailers just cannot take that kind of November. It will literally smash them to pieces,” said the founder of Sports Direct the other day, bemoaning the state of the high street. ONS statistics, by contrast, suggest life ain’t so bad. On a seasonally adjusted basis, the quantity of goods bought last month improved by 1.4%, reckon the boffins.
We’ll have to await retailers’ new year numbers to discover the truth, but economists have long suspected that Black Friday baffles the ONS’s “seasonal adjustment” calculator. And the British Retail Consortium will not be alone in thinking there’s something fishy in the ONS’s apparent belief that the value of sales at large retailers improved by 1.8% in November, but the smaller variety enjoyed a surge of almost 14%. Really?
In the meantime, here’s a trading update from Boots, from within its parent company’s figures. Retail sales fell by 2.6% on a like-for-like basis in the September-November quarter. Boots is supposedly a sure-and-steady outfit. Ashley’s account sounds nearer the mark.
Generous tip for Duke Street
How nice, private equity outfit Duke Street is spreading some Christmas cheer by leaving a tip for Wagamama’s staff as it sells the chain to the Restaurant Group for £559m. About 4,000 people will share the bonus pot. Well done.
Mind you, the celebrations among Duke Street partners will probably be grander. The firm made a 3.4-times return on its money during seven years of ownership and, on one calculation, Wagamama is changing hands at the highest price ever paid for a restaurant in the UK. Duke Street’s timing looks superb; Restaurant Group’s doesn’t.
