Banks to the left, insurers to the right; there have been distressed equity issues galore since the credit crisis erupted. Meanwhile, companies willing to brave the storm and raise equity capital for acquisitions can be counted on one hand. Finmeccanica, the Italian defence company buying US electronics maker DRS Technologies, is one example. Another is Centrica, the British utility that on Friday launched a £2.2bn rights issue to fund its purchase of a 25 per cent stake in British Energy.
In both cases, the issues have been forced by a timetable that began ticking before stock markets imploded. Finmeccanica announced its takeover in May. Centrica’s deal stems from talks this summer. Given current conditions, neither are taking any chances. Both are issuing new stock at a steep discount. Both have committed shareholders supporting the issues – in Finmeccanica’s case, the Italian government. And both have engaged investment banks to underwrite the issues.
Centrica’s story has a further twist. EDF, which is buying British Energy and will then sell a quarter of the company to Centrica, wanted the security that its partner had funds available before making that deal legally binding. Should the EDF/Centrica agreement fall apart, however, perhaps for regulatory reasons, Centrica will either use the money raised to buy another energy supplier or return the funds to shareholders.
Allow for underwriters’ fees and this is a potentially expensive way of going about things. Some of Centrica’s institutional shareholders are acting as sub-underwriters, instead of the hedge funds that had increasingly been taking on that role. This is nothing novel: it was the norm a decade ago. Combine this with the observation that the need to raise equity as a substitute for debt can only rise, and it is another sign of how the credit crunch is pushing banking back to the future.
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