IAG, the parent company of British Airways, was forced to issue a Stock Exchange announcement on Friday after Reuters reported that it was planning a €2.75 billion rights issue to prop up its shrinking balance sheet.
The appetite for this will be interesting. The IAG share price fell by 5% on Friday, but it could arguably have been worse. It will be interesting to see how keen shareholders are to put their hands in their pockets, when IAG could arguably follow Air France KLM and Lufthansa and demand a similar €10 billion of soft loans and non-repayable grants from the Spanish, and potentially UK, Governments.
What is a rights issue?
For readers unfamiliar with City terms, a ‘rights issue’ is when a company issues new shares – usually at a discount to the existing share price – and offers them for sale to its existing shareholders, pro-rata to their existing shareholding.
This bit is simple enough. What makes it more complex is what happens if you do not take up your rights.
Because the new shares are being offered to you at a discount to the current share price, your ‘rights’ have a value in themselves. If you refuse to invest new money, your ‘rights’ are sold on the open market and you are sent the money. It is roughly the equivalent of being sent a money-off coupon for a product you don’t want to buy, and choosing to sell the coupon on eBay instead.
IAG has already done a lot to raise cash
Desperate times call for desperate measures, of course. We’ve already seen, purely from the British Airways side of the IAG table:
and the drawing down of previously arranged debt facilities
This ignores the money raised by Iberia and by IAG centrally.
Of course, with the company burning through €200 million of cash per week, the actions above have only a temporary impact on the business.
Would a rights issue succeed?
The success of any rights issue will depend on the enthusiasm of Qatar Airways, IAG’s primary shareholder with 25%, to take part. Based on IAG’s valuation of £3.95 billion on Friday night, shareholders will be asked to put up the equivalent of 60% of the current value of their existing shares.
IAG will also have to be careful to ensure that the shareholding by non-EU entities remains below 49.9%. This could be tricky if Qatar Airways takes up its rights in full but other shareholders do not.
The real question is whether shareholders are happy to support IAG management in their plan to burn through shareholder funds rather than approach Government for a bailout. €2.75 billion will be gone after 14 weeks at the current spending rate, after all, and what does the airline do then? Return to shareholders for yet another €2.75 billion?
Here is the full Stock Exchange announcement:
Statement in relation to media speculation regarding equity raise
International Airlines Group (IAG) notes recent media speculation regarding the possibility of IAG undertaking an equity raise.
As detailed in its Q1 financial results announcement on 7 May, going into the crisis IAG had a strong balance sheet and liquidity with cash and undrawn facilities at 30 April of €10 billion. IAG has taken appropriate actions to strengthen its balance sheet and boost its liquidity position. This includes the announcement earlier today that IAG has extended its global commercial partnership with American Express and will receive a payment of approximately £750 million.
The Group is evaluating the merits of a rights issue of up to €2.75 billion that would further strengthen IAG’s balance sheet. No decision has been made as to whether or when to proceed with a rights issue.
A further announcement will be made as appropriate.
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