Deals in Capital Raising - 5 Things Investors Look At

Summary

• With a sudden stop to cash flows, companies raised massive amount of fresh equity capital in recent months, but some also raised capital to pursue growth opportunities instead of an intention to keep the business afloat.
• Capital raising programs by businesses force investors to consider the plans floated by them and evaluate the rationale behind fundraising.
• Capital allocation decisions by the management continue to play an important role in delivering acceptable shareholder returns.

Of late, investment bankers have been quite busy, chasing companies that seek to raise capital. Regulators also eased compliances to promote efficiency and liquidity.

Kogan.com is Raising Additional Capital

Kogan.com Limited (ASX:KGN) raised $100 million through a placement this month. The company is also running a Share Purchase Plan to raise up to $15 million. KGN intends to use the capital raised to fund potential value accretive opportunities and provide financial flexibility to the business.

The company had delivered operating leverage over the past and its capital deployment approach remains disciplined. Management seeks to capitalise on the arising opportunities in the market.

More importantly, the company announced capital raising plans when its shares were trading near to 52-week high levels.

On 26 June 2020 (AEST 11:35 AM), KGN was trading at $14.710, down by 1.802% from the previous close.

NEXTDC Raised $863 Million During the Crisis

In April, NEXTDC Limited (ASX:NXT) announced its capital raising intentions when its share prices were touching lifetime highs. The company has raised a total of $863 million from institutional investors as well as retail shareholders.

Share Purchase Plan bagged $191 million, depicting strong interest from eligible shareholders. Institutional investors committed $672 million under a placement, which was fully underwritten.

NXT raised additional equity capital to develop a new data centre in Sydney and provide balance sheet headroom to pursue growth initiatives after the company bagged some new contracts. The company incurred $15 million in transaction costs.

On 26 June 2020 (AEST 11:37 AM), NXT was trading at $9.750, up by 0.723% from the previous close.

Southern Cross Media Group Issued Large Number of Shares

In April, Southern Cross Media Group Limited (ASX:SXL) announced its capital raising plans. The company launched a fully underwritten equity raising of $169 million, which also included a retail offer. These initiatives would provide the business with balance sheet flexibility.

SXL highlighted that the equity raising program would result in the issue of around 1,873 million new shares, representing ~244% of the existing shares on issue. Unfortunately, the company was forced to raise capital when share prices were near to 52-week low levels, resulting in large number of new share issuance and dilution.

On 26 June 2020 (AEST 11:38 AM), SXL was trading at $0.180.

5 Things to Look at Capital Raising Plans of a Business

Should you add to avoid dilution?

Avoiding dilution is important for your long-term investments, and when a portfolio investment is seeking to raise further equity capital, it becomes imperative for investors to take part in the capital raising process.

Deal terms like issue price continue to depict investor sentiments. Companies that raise funds in a lower bound price range continue to be at higher risk of dilution, while some raise funds near historic high valuation range.

Increasing stake in convincing long-term investment continues to convince investors to allocate capital. With mandatory lockdowns, the cash flow hit to businesses was perhaps a risk of permanent loss of capital.

Application of Funds

Are you convinced with what the company is selling you for the fresh capital? Investment decisions of the businesses continue to be game changers in the build up to acceptable shareholder returns. Failed mergers and acquisitions could be among the lessons from the past when capital allocation decision did not yield desired outcomes.

At times, businesses raise capital to pay off debts and de-risk balance sheets. Management’s rationale behind the chosen funding route or source of funding will likely deliver better results when executed efficiently. Assessing past capital allocation decisions and results will allow to check management ability to deliver results.

Related: ASX: Surviving COVID-19 Crash

Financial Performance

Investors want to make money and encouraging financial results help them to consider an investment case for the business. Financial performance of the business is considered while evaluating the profitability of the business.

For an emerging company, financial performance could be deceptive as these companies burn more cash due to relatively newer business, products and services. Investors are inclined to check growth achieved by the business and achievements of targets.

Market Size and Opportunity

Perhaps fundamental factors indicate potential growth for the business. Products and services offered by the business should have an appropriate market size to capitalise on the available opportunity.

A business with a large target market will likely have more opportunities. Intensity of competition in the market is also crucial to determine the viability of products and services, thus growth of the business.

Competitive advantages over other players in the market allow the business to improve scale. It also helps retain customers due to the value offered to them. In addition, businesses with multiple products and services will have a more diverse target market and opportunity base.

Industry Readiness and Business Model

Companies with a demonstrated history of delivering results depict industry readiness of the business. Investors are also keen on evaluating management performance over the years and consider checking backgrounds of the people leading the business.

Business model allows to know how the company is or intends to make money. It would enable to check viability of the business model in current market environment as well as profitability of the business.