Nine months is a long time in the context of the global financial crisis. When Wesfarmers raised $2.5 billion of equity last April it was convinced that the sheer size of the raising had permanently de-risked a balance sheet stretched by the acquisition of Coles.
Today it announced another issue that will raise at least $2.8 billion and, depending on the take-up of the retail offer, could end up pouring more than $3.5 billion of cash into Wesfarmers’ coffers. It also announced a massive restructuring of its debt, a restructuring facilitated by the capital raising.
Two things happened between last April and today that forced Wesfarmers to do what might otherwise have been regarded as unpalatable for a group that prides itself on its returns on capital and its disciplined financial management.
One was the evolving realisation that as the financial crisis has continued and moved through its phases there is no certainty, even for the bluest of blue-chip companies with the best of relations with their banks, that facilities will be rolled over or readily refinanced. The rollover risk for companies around the globe is developing into the next most significant risk to the stability of financial systems and economies.
The other was that, as the real economic effects of the crisis started to bite, the Chinese and Japanese economies slowed very sharply and abruptly. Coal volumes and prices, which had provided a brief bonanza for Wesfarmers and looked like providing a safety net under its cash flows and earnings as it splurged capital and attention on the Coles brands in the first stage of their hoped-for turnaround, are unravelling and can no longer be relied on for security.
With $7.4 billion of debt maturing over the next two years (including a $1 billion revolving facility that Wesfarmers was confident would be rolled later this year) Richard Goyder and his board looked at whether they could finesse the financing task by slashing dividends (which they have), cutting spending and selling assets.
In the present environment uncertainty feeds on itself in a very destructive fashion. Wesfarmers shares had already been sold off heavily in the expectation that it would be forced to come back to the market. If it didn’t, it would inevitably have been doubly punished as the market focused on the massive refinancing task.
Given that an issue was already priced into the market, Wesfarmers did the sensible thing and decided to settle the issue once and for all. Knowing that it will be quite some time before it can tap the market for equity again — an attempt at a third raising anytime soon would be such an admission of failure that Wesfarmers probably wouldn’t survive — it has opted for the biggest issue the market could absorb.
The institutional component of the raising — $1.9 billion — is underwritten and therefore virtually locked in. Another $900 million will be raised through a placement to Capital Research Global Investors and Colonial First State at $14.25 a share, a premium to the $13.50 3-for-7 entitlement offer. The placement would have helped get the underwriting across the line but also represents a big vote of confidence in Wesfarmers’ prospects.
Depending on the appetite of Wesfarmers very large retail investor base for a stock whose dividends have just been halved, from a foreshadowed $2 to $1, the group could get anything between an extra $400 million and $1 billion of cash from that source.
The equity raising is a means to an end — it has enabled a major overhaul of the structure and size of the group’s borrowings.
Wesfarmers has about $9.7 billion of debt. Apart from the $1 billion revolving facility, about $1.1 billion matures this year and $5 billion in October next year. With the proceeds of the raising the group will be able to reduce debt to $6.9 billion, and net debt to $6.5 billion once existing cash of $400 million is taken into account.
Wesfarmers will pay down some debt and has agreement from most of its lenders to then extend the maturities of their facilities. Over the next two years the refinancing task has been reduced from $6.4 billion to $1.6 billion, while Wesfarmers has increased its access to undrawn debt capacity from $1.2 billion to $2.5 billion. It has more flexibility to manage a far more manageable debt maturity profile.
Raising the best part of $6 billion of equity in less than 12 months means Goyder has effectively massively increased his bet on the Coles turnaround. Having foregone financial leverage, unless that turnaround is spectacular, Wesfarmers would have little if any hope of regaining its reputation as a high-performing company and the superior sharemarket rating that comes with it.
At least, having secured his balance sheet, Goyder will be able to focus fully on managing Wesfarmers’ diverse portfolio of businesses and trying to regain credibility and restore the group’s reputation for flawless execution and consistent growth.