3i headlined its first full-year post-Yea results with a £732m equity capital raising. Michael Queen, Philip Yea’s successor as CEO, said in a post-results conference call that the cash is expected to reduce pro forma net debt to £1.1bn, gearing from 103% to 42%, and provide headroom for the existing portfolio and potential bargain purchases in the short term.
Bank of America Merrill Lynch and JP Morgan Cazenove are joint bookrunners on the issue and have 70% of the underwriting. The rest of the underwriting syndicate comprises Citigroup and RBS Hoare Govett as joint lead mandaters, with Lloyds TSB and Societe Generale as co-leads.
Investors will get nine new shares for every seven they own at a price of 135p, a 60% discount on the 339p closing price the day before the rights issue announcement. Since then, 3i shares have risen to 385p. Shareholders will vote on the issue at an EGM on May 27 and the subscription period will run from then until June 11.
“There is a recognition by institutional shareholders that there will be winners and losers in this economic environment, and it is important that the winners emerge well capitalised and can hit the ground running,” said Queen.
Queen will be hoping to improve on the £1.3bn of sales in 2008, described in a post-results conference call as “one of the worst M&A markets ever”. It was still a substantial drop from the boom times (£2.438bn in the full-year to March 31 2007 figures, £2.2bn in full-year to March 31 2006) and the £1.742bn announced on March 31 2008, but £366m of sales in the last quarter of 2008 showed some signs of improvement.
Queen admitted that some assets were sold on the basis that their strategic position might get weaker over the next few years and that it was better to “take a hit” now than later when valuations might be lower. He noted that it is increasingly tougher to sell above opening values when overall valuations have dropped by more than 30% over the year.
There are some concerns amidst the portfolio. Five portfolio companies are currently in breach of covenants, which equity valued at zero and Queen said another three or four are expected to follow over the next year.
A less likely sale is 3i Group itself. Shortly after becoming CEO, Queen says he initiated a strategic review, looking at 3i “almost as a potential investee company”, but he dismissed the notion of taking itself off the public markets via an MBO (“I suspect shareholders would have thought we were the ultimate insiders”) and noted that listed funds are simply more visible. “My view is that 40% of current private equity players will not raise another fund,” he said. “They are suffering pain but away from public scrutiny.”
Further regulation is coming, said Queen, and 3i is well placed to demonstrate good governance in the next phase of private equity’s development.
3i’s fundamental disadvantage as a public entity, said Queen, was the perception of financial weakness, despite its cash position: more than £1bn on its balance sheet and significant undrawn dry powder across its funds. Visibility on 3i’s debt levels, however, have helped foster the public perception of 3i as a distressed seller. “When buying, we were being asked if we were good for the money, which puts you in a very weak financial position,” said Queen, adding that the capital raising is partly aimed at shifting that “false perception off the table”.