Occasionally, the answer is simple. A year ago, and despite their dilution, investors in media distributor Entertainment One (ETO) were immediately convinced by a $75m (£57m) placing to buy out the remaining stake in subsidiary Mark Gordon Company.
Sometimes, a placing raises more questions than it answers. Before they approve the deal on 11 February, shareholders in Gordon Dadds (GOR) should want to know why the law firm this week decided to flog £11.5m-worth of shares to institutional investors at a 26 per cent discount, if indeed the sale was “well oversubscribed”.
An ad hoc share sale therefore acts as a test of both management and market nerve, as well as a lens to company strategy. It is only right that shareholders should ask themselves whether they feel concern or reassurance.
For ordinary investors in Savannah Petroleum (SAVP), that task reared into view after markets closed last Wednesday (23 January), when the Aim-listed oil and gas group suddenly announced a $23m (£17.4m) placing with institutions and directors. The accelerated book build, which had completed by the following morning, resulted in the issue of 62.8m new shares at 28p a pop.
Analyst coverage was divided. Broker and bookrunner Mirabaud acknowledged that while it “had not been foreseen”, the financing offered “a bridge to completion” for the group’s ongoing Seven Energy deal. Panmure Gordon analyst Colin Smith saw things differently, suggesting the placing’s 9 per cent discount to the market price was both “steep” and unsurprising, “given the company appears to require emergency finance and the overall complexity of [the Seven Energy] transaction”.
Although retail shareholders weren’t invited to participate, directors were, and duly coughed up £588,000, alongside existing and new institutional investors including JO Hambro and PT International.
That Savannah can apparently push on an open door to capital markets should not be dismissed. But the fundraising also arrived with what looked like red flags. For a start, Savannah tapped the market just 13 months ago, when it raised $125m in December 2017 to fund drilling in Niger, top up its corporate coffers and meet its commitment to buy two producing onshore oil and gas fields and a midstream business from the troubled Nigerian firm Seven Energy.
Since then, it has signed a separate $50m debt facility, increased its proposed holdings in some of the Nigerian assets, and sold down others, for which it expects to receive a $70m cash consideration once the deal completes. The complexity of the deal might help to explain why the placing made no mention of the group’s financial position, and provided only a cursory reference – “to fund working capital and general corporate purposes” – to its uses.
But according to broker and bookrunner Mirabaud – which somehow had access to information the company would not disclose to the market – only $3.5m of the funds have actually been set aside for working capital. Of the rest, $13m has been earmarked for a forthcoming drilling programme in Niger, with the remainder chewed up by legal costs.
As the overrun in lawyers’ fees implies, the transaction has taken longer than envisioned, but is still expected to complete before the end of March, whereupon Savannah has told investors to look forward to a $90m cash inflow from various Seven stakeholders and a $12.5m maiden dividend with 2018 results. In the meantime, there is the small matter of the Nigerian general election on 16 February.
