As global equity markets remain highly volatile and headline-driven, it seems Asian companies in need of capital have decided that rights issues are their best bet. The latest issuer to announce plans to tap their existing shareholders for funds is Thailand’s Big C Supercenter, an operator of hypermarkets, convenience stores and health, beauty and pharmacy stores.
The company said yesterday that it is seeking up to Bt25 billion ($810 million) from the fully-underwritten offering, which is expected to be completed by mid-December. It has yet to fix the offering price and has given itself a lot of flexibility in that respect, by saying that the deal will comprise between 220 million and 350 million shares. The company has a current market capitalisation of about $2.6 billion.
Big C’s announcement came after New World Development, New World China and K-Reit Asia said earlier this week that they are also planning rights issues. Together, those three deals will raise $2.8 billion over the next couple of months. The New World group said in written statements that it had considered other fundraising alternatives, but felt that a rights issue was the most cost-efficient way to raise long-term funds amid current market conditions.
Asian equity markets took another hit yesterday and Thailand’s benchmark index fell for the third straight day. Yesterday’s 3.1% drop means it has now lost 20% from its 2011 high on August 1.
However, a source said yesterday that Big C isn’t turning to a rights issue because it feels it has no other options. Rather it actively chose a rights offering because the controlling shareholder is keen not to have its stake diluted, as would be the case if it had done a follow-on share issue to a wider group of investors. The company also noted that it will allow its existing shareholders to participate in the future growth of the company. The deal was unanimously approved by the board of directors on Wednesday.
The proceeds will be used to repay a loan taken up when Big C acquired Carrefour’s operations in Thailand at the end of last year. This will strengthen its balance sheet and improve the financial flexibility, which will “help to accelerate the company’s ambitious growth strategy”, it said.
Big C is 63.2% owned by French food retailer Groupe Casino, which has committed to take up its entitlement in full. The remainder will be underwritten by a syndicate of banks, including Credit Suisse, which is acting as global coordinator and lead international bookrunner. The other bookrunners are BNP Paribas, CLSA, Deutsche Bank, Bualuang Securities and SCB Securities.
The issue will need the approval from existing shareholders at an extraordinary general meeting on November 17. The offering price and the subscription ratio will be determined just before that.
If the company issues 285 million new shares (the mid-point of the indicated number of shares to be sold), shareholders will be entitled to buy one new share for every 2.8 existing shares they own, which suggests the rights issue will result in about 35% dilution of the existing share capital.
Bualuang said in a research note that it expects lower interest expenses and higher earnings should mitigate the effect of the earnings-per-share dilution.
Contrary to most other rights issues, shareholders cannot sell their nil-paid rights in the market if they don’t want to participate in the transaction and the company has yet to decide whether shareholders will be allowed to subscribe for additional shares beyond their entitlement. However, according to the release, shares that are not subscribed for will be offered to the wider market through a private placement.
Big C’s share price fell 12.9% to Bt99.75 after the rights issue announcement yesterday, which is an indication that not everyone is keen to contribute more money towards its expansion. The drop took the stock to its lowest close since the sell-off in global equity markets began in earnest in early August. Until now, Big C had held up relatively well and even after yesterday, the stock is up about 22% from 12 months ago.
Analysts are overwhelmingly positive on the company with 15 out of 20 recommendations being a buy. Their average target price of about Bt142 implied 24% upside before yesterday’s sell-off.
The Casino group’s commitment to invest another $512 million into Big C also shows a lot of confidence in the company’s ability to grow.
On Wednesday, Big C said its third quarter net profit rose 44% year-on-year to Bt811 million, which was in line with the analyst consensus. The gains were driven by a 53% increase in sales as the company continues to integrate the Carrefour business. During the quarter, the company also opened one new hypermarket, one Big C Market, 18 Mini Big C convenience stores and seven Pure drug stores.
On the more negative side, Big C said yesterday that it had temporarily closed one of its hypermarket branches and four branches of its Mini Big C convenience stores due to the continuing flooding in Thailand. This comes after it was forced to shut down its three distribution centres in Ayutthaya earlier this month as water levels had risen to a level that made operations hazardous, leaving only one of its ordinary distribution centres in operation.
The five stores that have been temporarily closed represent a small portion of the company’s network of 204 stores and the business interruption is covered by insurance. And while the flooding is expected to squeeze the margins of food retailers, due to reduced logistics efficiency and higher logistics expenses, the effect should be short-term only, Bualuang said in a research note issued last week. The firm estimated that the negative effect on earnings will be less than 2% and said any drop in the share price as a result of the flooding will be a good opportunity to accumulate the food retailers at bargain prices.
Assuming the deal is approved by shareholders, November 23 will be the record date for determining who is entitled to participate. A more detailed timetable has yet to be disclosed.
