Kerry Stokes’ appetite for using both debt and other people’s money was on full display yesterday when he went on a debt-funded binge buying control of Coates Hire and then did a sudden about face with a rapid-fire $400 million capital raising.
The drama rolled out as follows:
At 8am yesterday morning, this statement was lodged with the ASX explaining that Seven Group Holdings was spending $517 million buying the 53% of Coates Hire that it didn’t already own.
The market was impressed and shares in Seven Group Holdings soared $1.10 to $12.28, valuing the company at $3.45 billion. The stock has nearly doubled from its low of $7.11 in January, courtesy of stronger resources and energy markets.
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Then, just hours after not mentioning any form of equity raising to fund the acquisition, the company rushed out a second announcement at 7.49pm — almost half an hour after what looked like the final announcement of the day by State Street at 7.21pm.
The cash issue, consisting of a $375 million placement to big shareholders, plus another $25 million share purchase plan for retail investors, may have resulted from pressure from Stokes’ bankers given the huge $2.56 billion debt Seven Group would have after the Coates Hire deal closes.
Coates Hire was a debt-funded pre-GFC acquisition by Stokes and private equity firm Carlyle, but because Seven Group only owned 47%, it didn’t need to consolidate the $1.08 billion in debt sitting on the Coates balance sheet.
On top of this, Seven West Media — which is 41% owned by Seven Group holdings — has $795 million of debt in its own right, making it the most indebted of the listed Australian media companies in a shrinking sector.
Before taking the Coates plunge yesterday, Seven Group Holdings was already loaded up with $1.48 billion in debt. No wonder there was unease yesterday at that structure and why the capital raising emerged last night.
And it’s a wonder why Stokes and his advisers didn’t see that coming. In the Coates statement yesterday morning, Seven Group 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.”
Not a mention of the issue there or in the presentation released to the ASX. But a pro forma balance sheet in the presentation to investors had all the details on page 21.
All up, with the cash from the Chinese sale, Stokes and Seven Group would have had close to $1.9 billion to pay for the Coates purchase, but, in the longer term, it also required rollover support from a syndicate of banks.
The equity markets might have enthusiastically embraced the deal, but you can imagine the reaction of worried Coates bankers given their sudden exposure to the next resources industry downturn.
Having allowed shares in Seven Group to trade all day, the Stokes crew only had a brief window to move after the market closed at 4pm last night.
It must have been a scramble to round up enough investors to shell out $375 million at $11.20 and get all this announced by 7.49pm last night, which was too late for all of the newspapers today.
Interestingly, Kerry Stokes is not putting his hand in his own pocket to support the deal and has voluntarily diluted his personal stake in Seven Group from 73.6% to 65.4%, which is still worth more than $2 billion based on the placement price.
It will be interesting to see how the shares trade tomorrow given that investors don’t generally like companies doing sudden backflips like this.
Seven said the issue of new shares will “provide capacity to support future portfolio enhancements following completion of the Coates Hire acquisition”.
It will also “improve leverage to 3.1 times from 3.8 times”. That was the tip that the bankers were worried about the high level of leverage and wanted Seven and Stokes to cut it.
Like in most change of control situations, the banks held the whip hand. Coates carries $1.0238 billion in debt and Seven said in the first statement it would ask the banks to consent to roll that debt over into Seven Group, and, failing that, may look to refinance.
Last night’s rushed capital raising from the company tells us that the banks may have said “nope” — not without more capital in the Seven Group balance sheet and a reduction in leverage.
Seven also justified the decision as saying it would increase the free float from 26.4% to 34.6%. That’s the number of shares available to the market, Kerry Stokes owns the rest. And there’s another clue: Stokes will not participate in the issue — he will not be putting in any of his own money. If it had been a pro-rata raising, Stokes would have had to find $265 million in cash from his own resources, which would have meant leveraging his personal shares in Seven Group, the largest source of his wealth.
The placement will comprise the issue of 33.5 million shares at an issue price of $11.20 to institutional and sophisticated investors. There is no disclosure as to who has been bought these shares under Australia’s anything goes system of capital raising whereby companies can sell 15% of their stock to non-shareholders in any 12-month period.
Small shareholders will be offered the same deal, but they are being limited to just $15,000 worth of stock each and $25 million overall.
For independent shareholders who have backed Stokes in the past, it has been an ugly experience for the old WA News, which now trades as Seven West Media.
This was a company that foolishly paid $4.1 billion to buy private equity firm KKR out of Seven’s television, magazine and digital assets in 2011.
Since then, Seven West Media shares have tanked badly after a succession of equity raisings to pay down the debt, which remains uncomfortably high, particularly in the context of Ten group going broke with debts of less than $150 million.
With such a record of disappointing minority shareholders, it is somewhat surprising that investors were prepared to back the Seven Group raising — albeit at an 8% discount to last night’s closing price.