Weathering the storm: J D Wetherspoon PLC £141m equity raise
Wednesday 13th May 2020
J D Wetherspoon has successfully raised £141 million in equity (shares), an act that will help the chain weather the coronavirus pandemic. Whilst this dilutes Tim Martin’s stake in the pub chain, it is a move that generates sufficient liquidity, as the company has lost working revenue as a result of its 850 pubs being forced to close due to government guidelines. Additionally, the capital will hopefully make up for low sales after lockdown starts to ease, when consumers are still wary about meeting in pubs and restaurants with little social distancing. The company will be hit hard as pubs are predicted to be some of the last establishments to open back up and despite Wetherspoon announcing that they were planning on opening back up in June, this is looking unlikely. Last month, the company cancelled its interim dividend, and is proposing not to pay a final dividend.
In the future, we could be seeing another equity raise, as Canaccord Genuity have predicted that the company may need to raise up to £250 million in order to survive the liquidity crisis. This not only accounts for closure and potential weak demand post-lockdown, but also “its high-volume, high-cost, low-margin business model”. In an overly saturated market, Wetherspoon was succeeding by making minimal profit and delivering low-cost products, pricing most of their competitors – who could not generate the same amount of turnover – out of the market. In the current crisis, with no income coming in and no foreseeable profits, raising more liquidity could be their only way out. In the past week alone, share prices have dropped by 9.44%, continuing the downward trend that Wetherspoon has experienced in the stock market.
Part of a trend?
The raise of equity is part of a clear trend affecting businesses that have been hard hit by the pandemic. Sir Richard Branson has recently announced that he is selling a stake in Virgin Galactic to raise $500 million to prop up his various businesses, including Virgin Atlantic, after his efforts to raise finance from taxpayers failed. Similarly, Intu (the owner of Manchester’s Trafford Centre and Lakeside) was attempting to raise £1.5 billion, a venture that has since failed due to a lack of confidence from investors. In the current climate, with a forecasted recession on the horizon, large companies are looking for alternative ways to raise money as the government has been focusing on saving smaller businesses through the Coronavirus Business Interruption Loan Scheme (CBILS). With the lack of confidence from investors and the accelerated downturn in the high street, it is likely that a substantial number of businesses will have to close if they are unable to raise the liquidity needed to survive lockdown and social distancing measures afterwards.
Why raise equity instead of debt?
The main advantage of equity is that there is no obligation to repay the money acquired through it, as the rate of dividend on the shares is dependent on the profits of the company. This is particularly useful at a time when companies are making little to no profit. A company is limited as to the amount of debt that it can carry, and debt financing requires payments and interest charges that would not be beneficial for companies during the current pandemic. Furthermore, equity financing places no additional financial burden on a company, and when the company does start making a profit again, it can invest the money back into the business. Whilst ownership does become diluted, investors can be bought out after the effects of the pandemic start to become less harsh.
