To this end, Guinness has scheduled an Extraordinary General Meeting (see attached) for the 24th of January 2017, wherein it will seek shareholders’ consent for the rights issue before proceeding to obtain regulatory approval.
Backdoor avenue for Diageo to raise stake? Coming a few months after its parent company (Diageo) rescinded a planned tender offer to increase its equity stake in Guinness due to deteriorating operating environment, we believe the capital raising exercise provides a good window for Diageo to accomplish the same feat. Importantly, having provided $95 million (~N29 billion) financing to Guinness, Diageo also has an incentive to convert its debt into equity.
Sour grapes for shareholders? If the rights issue is executed at current pricing, and assuming all current shareholders take up their rights, Guinness may have to issue ~500 million new shares (33% of current outstanding shares). Thus, given the sizeable dilution implied, we think the market is more likely to respond negatively to the news.
Positive for leverage and coverage ratios: Despite the scope for downside in share price, in the event that Guinness converts the $95 million facility to equity via the rights, we estimate the company’s total debt to reduce by 67% (FQ1 17: N43 billion). Furthermore, the de-leveraging should drive cutback in interest expense by ~ 39% (-67% on average over our forecast horizon) while also reducing exposure to FX losses—a key driver of the consecutive losses in the past two quarters
GUINNESS trades at a current EV/EBITDA of 9.5x relative to 11.8x for Nigerian Breweries and 7.1x for International Breweries. Though cost savings from debt reduction and significant removal of FX-related losses augur well for earnings, analysts at ARM Securities Ltd
expect dilution impact to drive a 17.5% downward revision to our FVE if shareholders approve the rights issue. Pending further clarity from the EGM, they retain SELL rating and FVE (N70.40) on GUINNESS