case study - right issue: kingfisher (july 2002)
Introduction
This brief case study outlines the details of one of the largest rights issues seen in the UK in recent years.
Firstly, a reminder of what a rights issue is:
A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings.
A rights issue is, therefore, a way of raising new cash from shareholders - this is an important source of new equity funding for publicly quoted companies.
Introduction to Kingfisher
Kingfisher is Europe's leading home improvement retailer, and is ranked number three in the world.
Kingfisher operates more than 580 home improvement stores in 11 countries, with market-leading positions in the UK, France and Taiwan.
Kingfisher's sales in its home improvement outlets during the year to 2 February 2002 were £5.8 billion, generating retail operating profit of £430 million.
Kingfisher also has substantial retailing interests in electrical & furniture markets, operating more than 820 stores in nine countries. It is Europe's third largest electrical retailing business by sales and number two by retail profit. As well as holding the leading position in France and the number two position in the UK, Kingfisher also enjoys leading positions in Belgium and in the Czech and Slovak Republics. Sales of electrical and furniture goods during the year to 2 February 2002 were more than £3.7 billion, with retail profit of £184 million.
The Kingfisher Rights Issue
On 19 July 2002, Kingfisher launched the largest underwritten rights issue in UK corporate history, as the retailer asked existing investors for £2 billion of new equity to help finance its €5.1 billion (£3.3 billion) bid for the remaining minority stake in Castorama - a leading European home improvement retail brand.
The balance of funds to pay for Castorama will come from a new €2.4 billion debt facility provided by Kingfisher's banks
The fundraising is the second largest rights issue ever seen in the UK. In 2001, BT raised £5.9bn, but that was not underwritten.
The terms offered to existing shareholders
Kingfisher shareholders were offered one new share for each share held, at 155p each. This price represented a 50 per cent discount to Kingfisher's trading share price just prior to the announcement of the rights issue. In other words - Kingfisher shareholders were being offered new shares at "half price" - provided they took up their rights to buy at this price.
Sir Geoff Mulcahy, chief executive of Kingfisher PLC, defended the retail group's rights issue discount of 50 per cent on the basis that it was in line with recent issues absorbed by the London stock market.
"There's always debate about these discounts, but essentially
this is well in line with recent issues. It doesn't actually make any difference
to the economics because basically we're just raising this amount of money
to buy a business that has value."
Rationale for the Castorama acquisition
Kingfisher is acquiring Castorama as part of its attempts to build a pan-European home improvement retail business.
In deciding what price to offer for the Castorama business, Kingfisher had estimated cost savings of £30-40 million and integration benefits of £40 million in the first year, rising to £55 million in the second year.
Mulcahy said these savings will be achieved through driving further growth in B&Q and Castorama Poland and the reinvigoration of Castorama France; the extension of the B&Q product cost reduction programme across the rest of the group; and the integration of the two head office functions in London and Lille and removal of duplicate overheads.
Mulcahy also said that Kingfisher will work with Castorama to create a new integrated management team.
How successful was the rights issue?
The success of a rights issue is usually best measured by the proportion of shareholders that take up their rights to buy new shares at the discounted price.
On 5 August 2002, Kingfisher announced that, despite turbulent stock market conditions during the course of the rights issue, over 95% of existing shareholders had exercised their rights to buy new shares at £1.55 per share. The remaining rights were acquired by the underwriters.
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