Companies start to take advantage of benign markets

David Hellier
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THOMAS Cook’s £1.6bn recapitalisation plan received a massively positive reception yesterday in the City where the once battered holiday group’s shares rose 13.4 per cent from the previous day’s close.

Such a market movement is highly unusual since most rights issues, including this one, involve pricing new shares at a discount, which tends to average down the price of all shares. Then the very fact there is a greater supply of shares would likely have a depressing effect on their price. In this instance the rights issue and placing of new shares represents a 45 per cent increase in the number of Thomas Cook shares in issue.

Bankers to the Thomas Cook deal, which involves far more than the issue of new equity – there are also new bonds and bank facilities – said the turnaround already undertaken by Harriet Green’s management team was vital to the way the transaction went down with investors.

Observers said that a number of shareholders who had sold out of the company during its time of distress were now wanting to get back into it. On top of this some pointed to the stronger market conditions, which sees the FTSE 100 index regularly hitting five and a half year highs.

The successful execution of the deal, for a company that not so long ago was on its knees, augurs well for others considering raising new funds.

Next up could be FirstGroup, the transport company, whose debts are around £2bn and around 29 times earnings.

Investors in the company are prepared for a dividend cut already next week but analysts are divided on whether a rights issue will be triggered as well.

Sources say that advisers to the group, who remained totally silent when I quizzed them about it all earlier in the week, have been testing the market appetite for an issue of new equity for the past few days.

There is less of a compelling reason to back an issue at FirstGroup than at Thomas Cook, however.

Management, under chief executive Tim O’Toole and a new finance director, have been making disposals to get the debt down but there is less of a growth story than one would want when going to the market for £500m.

However, having a less leveraged balance sheet would probably improve sentiment considerably and advisers to FirstGroup looking at Thomas Cook must be tempted to follow the lead.

What with the potential £5bn bid for Severn Trent in the offing and a possible takeover for ENRC, the Kazakh resources group, being contemplated, and the possibility of a renewed takeover attempt for Betfair, there is more happening in both the world of rights issues and mergers and acquisitions than for some time.

This column has already written about the increase in Europe of block sales, the sales of large blocks of shares in public companies, such as in EADS or Ziggo.

For as long as markets remain bullish companies will want to take advantage of the opportunity to replenish battered balance sheets; those already strong may feel bold enough to make bolt-on or transformational acquisitions.