The arrival of issues from heavyweight firms such as France Télécom, tour operator Tui, French utility Suez and Irish telecommunications firm Eircom underline the return of corporate confidence.
Companies are looking at how they can grow rather than how to consolidate or restructure their balance sheets, according to Richard Brown, associate director at the quoted companies' team at KPMG Corporate Finance in London.
Previously, proceeds from rights issues were used to recapitalise debt-ridden companies, but the latest deals are to raise cash for acquisitions.
John Hatherley, head of global analysis at M&G Investment Management in London, said companies were optimistic about growth. "There is a higher level of confidence than a year ago," he said.
Hatherley said that from an investor's point of view "the use of the proceeds is an important factor to consider. It is not the sole or most important factor, but it is a good guide to the stage of the economic cycle which we are in."
The rights issues under way also indicate a change in companies' approach to investors, according to Brown.
"Five years ago it might have been the case that companies could raise funds for a war chest for unspecified acquisitions," he said. "That is no longer the case."
Brown said investors had become more wary as a result of poor acquisition decisions by companies in the early part of the decade, which ended up destroying value.
"There are also more potential investments out there for investors to look at," said Brown. "If a company is asking for money, investors want to know exactly what they are going to get in return and how the company plans to achieve it.
"Investors consider their own investment strategy carefully, and now they want to see the same level of consideration from companies," he said.
Hatherley said the spate of rights issues also indicates the nervousness of many companies to use the bond markets to finance acquisitions. "For a company such as France Télécom there is a clear choice between borrowing in the debt capital markets where yields remain historically low or tapping equity investors."
"In France Télécom's case, equity looks like the expensive option given a dividend yield of 4%, but there are other factors that the company has taken into account as well," he said.
Chief among these is a determination not to — and to be seen not to — return to the high levels of gearing seen in the years after the telecoms boom at the turn of the millennium.
Hatherley said that the decision by France Télécom and others to issue new equity rather than debt also indicated companies' confidence in the appetite of investors for new issues. "The same sentiment can be seen in the increasing volumes of IPOs coming to market," he said.
France Télécom
The largest of the recent clutch of rights issues announcements — indeed the largest this year — is France Télécom's Eu3bn issue, which was revealed on Wednesday.
The issue will provide part of the funds for the Eu6.4bn acquisition of 80% of Spanish mobile telecom company Amena, which was announced in July.
ABN Amro Rothschild, BNP Paribas, Goldman Sachs, Morgan Stanley and SG CIB are underwriting the issue.
A total of 133.4m new shares are being sold. Investors will receive one warrant for each share they hold. They need 27 warrants to subscribe for two shares, priced at Eu22.63, before September 13.
The stock closed at Eu24.60 on Tuesday before the details of the rights issue were announced. Yesterday (Thursday) the stock closed at Eu24.22.
The rights issue is a landmark for two reasons. Firstly, it represents the final stage of France Télécom's recovery since its Eu15bn rights issue in March 2003, which began the company's slow return to stability after the fallout from the recklessness of the telecoms boom.
Secondly, the deal is likely to mark the end of offloading of France Télécom stock by the government. The state has indicated that it will not take up its entitlement to shares, which will result in its stake being reduced through dilution to 33.1% from 34.9%.
The government's stake is split between a direct holding and one through the state-owned holding company Erap.
Although 33.1% is below the 33.3% legal blocking minority level, France Télécom has indicated that it still considers the government to hold blocking rights. The government is committed to retaining an influence over France Télécom — not least to prevent it falling into foreign hands.
Therefore, the audacious sale of 6.2% of France Télécom for Eu3.4bn at the beginning of June — immediately after a 'no' vote in France's referendum on the EU constitution dealt a blow to the government — is likely to be the last.
As the largest rights issue of the year, the France Télécom deal has predictably prompted some animosity from bankers who did not receive syndicate positions.
Banks were invited to pitch for the underwriting roles late on Tuesday evening. Up to 24 banks received an invitation and were asked to submit their bids for various sizes of underwriting commitment up to a maximum of Eu1.5bn.
Some bankers told EuroWeek that their pitches had been rejected despite offering better pricing and conditions than banks that did receive mandates.
A banker at one house not in the syndicate claimed to have submitted a significantly better bid than the eventual Eu22.63 — a discount to the theoretical ex-rights price of 7.7%.
Furthermore, some bankers claimed that some banks that did not initially receive mandates were given a second chance to bid.
"We always had an expectation that a French bank would be pre-selected whatever the outcome of the bid because of the importance of retail investors to the deal," said one syndicate banker.
He added: "Politics was always going to play a role. But we got the distinct impression that more than one French bank and possibly other banks were called and told that they would have to improve their bid if they wanted to be selected. The process was not fair at all."
France Télécom said that the mandating process has been quick and fair. "It occurred during the night, and there was certainly no chance for any second round of bidding," a company spokesman said.
Tui makes plans
Last Friday (August 26), Europe's largest tourism company, Tui, announced plans to raise Eu1.02bn to part-finance its $2bn (Eu1.6bn) acquisition of container shipping company CP Ships.
Tui made a further announcement yesterday (Thursday) confirming its bid for CP Ships and indicated that its offer would be open until October 7. Market observers expect the bid to be accepted by shareholders of both companies.
The acquisition of CP Ships by Tui follows the recent purchase of P&O Nedlloyd by Moller-Maersk.
Brown at KPMG said that shareholders in shipping companies were increasingly focused on the potential for cost savings as a result of acquisitions.
"Companies need to be able to specify synergies so that investors can monitor the performance of management in achieving those goals," he said.
Tui has said that it expects to achieve cost savings of around Eu180m a year after three years, once CP Ships is merged with its own Hapag-Lloyd shipping division. Integration costs are expected to be around Eu100m in the first year.
A total of 71.5m shares are being sold at Eu14.20 each, with shareholders able to buy two new shares for every five they currently hold. The stock had closed at Eu19.56 the day before the announcement of the rights issue and fell on the day to close at Eu19.10.
Some analysts had expected a smaller discount than the 27% announced by Tui for the rights issue.
Anything over a 20% discount is generally considered a deep discount and indicates a lack of confidence, said one banker not involved in the deal.
"Usually the argument is that a deep discount should ensure the success of the deal and underwriting costs can be kept low, but that doesn't seem to be the thinking here," he said.
The issue is fully underwritten, with Citigroup, Deutsche Bank and HVB as bookrunners and Commerzbank and WestLB as co-managers.
Spanish hotel group Riu, which owns 5.1% of Tui, has said that it will subscribe to its share of the rights issue worth around Eu50m.
The two week subscription period will begin today (Friday). Yesterday the stock closed at Eu18.79.
And Suez too
Another big rights issue likely to come to market shortly is the Eu2.5bn sale from utility Suez to part finance its Eu11.4bn acquisition of the 50% of Belgian electricity company Electrabel it does not already own.
The acquisition was announced in the second week of August and the company has said that a rights issue will take place within the next 12 months.
Calyon and Morgan Stanley, which have been advising Suez on the acquisition, are likely to win underwriting mandates for the rights issue, although appointments have not yet been made. Rothschild also acted as an adviser.
A spokesman for Suez said that it was too early to make a decision on underwriting positions.
"With no definite timetable for the rights issue it would be premature to announce underwriting roles," he said.
The spokesman said that the board of Electrabel had unanimously approved Suez's offer on August 26.
"The next stage in the process is getting approval from the Belgian regulator, the CBFA," he said. "They have indicated in the press that they will respond by around September 20."
Shareholders of Electrabel would then have around a month to accept or reject the Suez's offer.
The spokesman said the funding for the acquisition was not dependent on the rights issue but that an equity funding would make the acquisition "more balanced" than if the deal was funded solely through debt.
However, he reiterated that the rights issue could take place as long as 12 months after the initial announcement of the acquisition of Electrabel.
Brown at KPMG said that investors had become increasingly mature in accessing gearing at companies in which they hold stock.
"It is no longer a case of simply being resistant to high levels of gearing," he said. "It's a cliché, but there is now an expectation of companies finding the optimal level of gearing."
Other rights issues under way or about to be launched include a Eu423m deal for Irish telecom provider Eircom, which will be used to fund its purchase of Irish mobile telecom provider Meteor, which has a 10% market share.
A total of 313m new shares, or 29% of the enlarged share capital of the company, will be offered at a ratio of five for 12. The shares are priced at Eu1.35 — a 24% discount to Monday's closing price. Yesterday the stock closed at Eu1.90.
The deal, which is underwritten by Morgan Stanley and local stock broker Goodbody, allows Eircom to re-enter the mobile market four years after it sold its Eircell operation to Vodafone. It has since been restricted by a non-compete agreement.
Meanwhile, shareholders of Aberdeen Asset Management approved a £215m rights issue this week to part-fund the acquisition of some of the fund management businesses of Deutsche Bank.
