Market punishes SSE for shock £480m placement

Published on Wednesday 7 January 2009 20:32

MORE than £900 million was wiped off the value of Scottish & Southern Energy last night after the City took fright over a surprise £480m share placement by the company.

As it unveiled the move – to help fund its multi-billion-pound investment plans – SSE sought to reassure the markets that it would meet analysts' profit forecasts and that the new shares would qualify for its 19.8p interim dividend.

But despite this, when the markets closed SSE shares had fallen 8.2 per cent to 1,159p after the company placed the 42 million new shares with institutional investors at 1,140p a share.

Even adding in the value of the new shares, which will be admitted to trading on Monday, the company's value fell by more than 400 million.

After the placement was completed, SSE chief executive Ian Marchant struck a cautious note. Asked if the placement had been a success, he said only that it was a case of "job done".

He added: "The overwhelming sense is one of relief. In these difficult economic times being able to raise money, in the debt or the equity markets, is a relief."

Marchant said he was focusing on longer-term share movements and maintained that the company had been right to raise the cash.

He continued: "You have to ignore what's happening on the day. We've raised money at about the average share price we've seen over the last four weeks and I would expect our shares will recover."

The placement came as a surprise to the City, and it emerged last night that at least one institutional investor had reservations about the move.

The Association of British Insurers, an influential body that represents institutional investors such as Aviva and Standard Life, said one of its members had contacted it raising concerns over the placement.

It is not certain whether the ABI will take any action and there is no suggestion SSE broke any corporate guidelines.

Marchant said yesterday that the placement, conducted by Credit Suisse and Merrill Lynch, had the support of most of the company's major shareholders.

SSE had contacted its top 20 investors. All gave moral support and "all but two of the top 20 have supported us financially (by buying shares]", he said.

Marchant admitted that the company was worried that, without the placement, it could face credit downgrades or have to cut back on investment plans if debt and equity markets worsened. It had raised the possibility of issuing equity when it announced its interim results in 2008. SSE – Scotland's second largest company by market capitalisation – said it needed the money to fund a plan to invest 6.7 billion between 2008 and 2013.

Marchant stressed that the company was in advanced discussions over the acquisition of stakes in two wind farms, one in Scotland and one in Ireland, as well as initial discussions on other projects.

He added: "There are more opportunities currently than I have seen for six or seven years."

Analysis: Scottish & Southern cashes in on quickest way to raise capital

MOST of the recent focus on cash raising by selling shares has been on rights issues but typically companies raising a small amount of capital – relative to their market capitalisation – will conduct a share placement, selling the shares directly to interested investors.

In a share placement, investment bankers will spend the morning of the day it is announced calling potential investors around the City

, ideally finding the right price and closing the process within a few hours. Unlike a rights issue, which take at least six weeks to complete placements are usually the fastest, easiest and cheapest way to raise money.

They are also seen as a measure of strength, a sign that there is strong demand for a company's shares in the City. A rights issue can smack of going cap in hand to investors.

However, placements often prove unpopular among private investors because they are usually excluded, with only institutional investors invited.

This opposition can be heightened if, owing to a glut of shares on the market, the price at which the shares are placed is at a significant discount to the prevailing market value.

Roger Lawson, director of the UK Shareholders' Association, said yesterday that the group was opposed to share placements in principle.

He said: "There may be some circumstances where it's justifiable to hold a share placement, but in general we're absolutely opposed."

The Preemption Group, an organisation that represents institutional investor groups such as the National Association of Pension Funds and the Association of British Insurers (ABI), stipulates that companies are permitted to raise up to 5 per cent a year in a pre-emptive share placement, or 10 per cent if the cash is being raised to fund a specific acquisition.

Michael McKersie, the associate director of capital markets at the ABI, said rights issues were still the benchmark against which other equity placements are measured, and the organisation then looks at the manner at which shares are placed.

"What matters then is, is that the best terms for issuing shares, is that good cost of capital? That will be a function of whether there was a discount on the issue to the prevailing market value," he said.

In the case of Scottish & Southern Energy's placement yesterday, chief executive Ian Marchant said, correctly, that, because the company limited itself to 5 per cent of issued capital, it did not need to conduct a rights issue.

But depending on the longer-term reaction of shareholders, he may one day wish he had done one anyway.