A 3i rights issue would mean throwing away money
It is no surprise some shareholders in 3i object to a rights issue. Every pound they subscribed to the private-equity group would instantly be worth 50p or less.
Thousands of enterprises throughout Britain have good reason to be thankful to 3i. It has backed expansion and buy-outs when other sources of finance refused. Unfortunately, the company that has financed so many businesses is having trouble raising finance itself.
To all intends and purposes 3i (LON:III) is still an investment trust, a holding company owning stakes in many smaller firms. And investment trusts’ shares are valued by the stockmarket at a discount to their net asset value. That reflects the difficulty and costs, including taxation, of disposing of assets – plus any difference of opinion between the market and the company over the current value of its holdings.
According to 3i’s March 2008 balance sheet its net assets – the investments minus the debt – were worth £10.77 a share. Given the deterioration in stockmarkets since then, especially for smaller companies, the group acknowledges that its unquoted portfolio has fallen in value.
But 3i’s own share price has also fallen in value by at least as much. The shares currently trade at 339p, which is a discount of two-thirds to the net asset value in its last published balance sheet.
Even if the discount to current estimates of net asset value is only 50 per cent, subscribing £1 for a new share would be throwing away half the money if that new share trades at the same discount. That should be the investors’ reason for telling the company they do not like its rumoured plans to raise £700m.
3i has problems. Philip Yea apparently shunned the idea of a rights issue before he was ousted as chief executive this year. Michael Queen, his successor, should look for ways to raise money that do not instantly damage shareholders.
