Fresh capital: Know your rights

Strong balance sheets and solid shareholder bases have helped some companies cope with Covid-19, writes Shawn Stockigt

The SA economy was already fragile at the beginning of 2020, with persistently weak growth, low business and consumer confidence, and load-shedding.

Covid-19 transformed these conditions into a perfect storm, and many domestically orientated companies, particularly in leisure and entertainment, were caught in it.

The strength of SA management teams has been tested, with severe lockdown restrictions significantly intensifying the challenges of operating in a struggling economy.

Companies had to act quickly. The first levers pulled were the cutting of costs and forgoing or postponement of dividends. The priority was to build a liquidity buffer. Some companies were already taking decisive action to strengthen their balance sheets, given their concerns that the SA economy would stay weaker for longer. Those companies that entered the crisis with conservative gearing are generally managing to weather it well.

Other companies with weaker balance sheets were fortunate enough to have a solid shareholder base prepared to inject more cash in return for equity (through rights issues or bookbuilds), or shareholders prepared to provide support via loans (such as Walmart’s support of Massmart). Companies have also had to slim down by selling off assets (subject to their ability to find buyers at acceptable prices under current market conditions). Some businesses will not emerge from the crisis at all.

An example of a company which entered lockdown with a relatively strong balance sheet and a solid shareholder base is the self-storage real estate investment trust StorAge. It was able to take advantage of the crisis by raising about R250m via an oversubscribed accelerated bookbuild during lockdown. This helped it secure funding for the development of some of its SA properties as well as to fund its 25% contribution to its UK joint venture (Stor-Age King Development). The equity raise also provides capacity should portfolio-enhancing acquisitions arise in SA and the UK.

An indication of the demand from shareholders was the narrow gap between the 4.3% discount of the issue price of 1,185c a share and the weighted average price that Stor-Age shares traded over the 30 days prior to the bookbuild date.

Companies in weaker positions, such as Sun International and City Lodge, have had to accept wider discounts to their average share prices to raise cash to strengthen their balance sheets and be able to survive. Both companies are in the leisure and hospitality sector.

Sun International recently reported a headline loss of 702c a share, illustrating the carnage that the pandemic has wreaked on tourism. The company announced a rights issue to raise capital, and managed to raise around R1.1bn, or 95%, of its R1.2bn target (including applications for excess rights). The cash will provide the group with an anticipated additional 12 months of liquidity.

Sun International also used the lockdown to review its cost base and identified cost-saving initiatives of about R250m.

Other potential cost savings include possible retrenchments and early retirement options, which could affect as many as 2,300 workers in SA.

Sun International, through its Sun Latam subsidiary, is selling its stake in the Chilean casino Sun Dreams to its partner Nueva Inversiones Pacifico Sur Limitada.

These initiatives should not only help Sun International survive the Covid-19 fallout, but should position the group to perform strongly once international tourism returns to SA.

City Lodge entered 2020 already under pressure. It received a second blow from the impact of the pandemic and shutdown of its operations. It will have to adjust over the medium term to such changes as people being more likely to use video conferencing than to travel (and stay overnight) for business purposes.

Fortunately, City Lodge was able to raise R1.2bn in a well

“Companies had to act quickly. The first levers pulled were the cutting of costs and forgoing or postponement of dividends

City Lodge in Fourways, Johannesburg. City Lodge was able to raise R1.2bn in a well-supported rights issue, which for now should provide the necessary liquidity the company needs in the near term. Picture: JEREMY GLYN/FINANCIAL MAIL