3i plans £700m rights issue

The board of 3i, the private equity group, will meet Monday to discuss plans to raise £500m to £700m in a rights issue, as Michael Queen, its new chief executive, attempts to reduce the company’s hefty debts.

Directors were sent briefing papers last week. The cash call, which would be underwritten by JPMorgan and Merrill Lynch, 3i’s brokers, follows a sharp rebound in the share price.

The planned placing by Britain’s oldest private equity group will be a stiff test of investor appetite. Large UK companies, including HSBC, the bank, Land Securities, the property group, and Xstrata, the mining group, have asked investors for billions of pounds so far this year.

3i’s biggest shareholders, including Schroders, M&G and Legal & General Investment Management, are likely to be approached this week about the plan – expected to be announced when the company reports its annual results next month. The group’s shares fell 25¾p or nearly 7 per cent to 346p on Monday.

On Monday the private equity group confirmed it was considering a range of financing options including the potential issue of new equity. Shares in the group fell 25¾p or nearly 7 per cent to 346p in morning trading, giving it a market capitalisation of £1.43bn.

The share price has more than doubled since touching a record low of 174½p last month, when the group fell out of the FTSE 100 share index.

3i has a large part of its portfolio in the contracting UK economy and used debt to finance many of its deals. It has investments in hundreds of companies – including Agent Provocateur, the lingerie brand, Care Principles, the healthcare group and Inspicio, the testing company.

A rights issue would allow it to cut its net debt, which reached £2.1bn at the end of last year, and provide capital to invest at a time when company valuations have been falling and private equity hopes to snap up bargains.

“3i is likely to be well positioned relative to many of its competitors, especially in buyouts to grow its business, market share and pick up good assets at a time when many others are out of the market,” said Iain Scouller, analyst at Oriel Securities. 3i’s plan follows a similar move by SVG Capital, the biggest investor in private equity group Permira, which recently raised £100m, although only 53 per cent of investors participated.

3i said on Sunday it was “considering a range of financing options including the potential issue of new equity”.

People familiar with the plan said about £400m of the proceeds would be used to repay debt and the remainder would finance new investment. The company could seek to make an early repayment of a £430m convertible bond that matures in 2011.