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Compass points the way for retail investors

Compass points the way for retail investors
May 20, 2020
Compass points the way for retail investors

Alongside publication of predictably harrowing half-year figures, Compass Group (CPG) announced details of a £2bn share offer via an accelerated placing, involving both institutional and retail investors. The contract caterer is the first FTSE 100 constituent to incorporate a retail element within a non-pre-emptive placing of shares, although it is unlikely to be the last.     

Frustration has been growing amongst retail investors ever since the Pre-Emption Group, with the blessing of the Financial Reporting Council, decided to allow companies to raise up to 20 per cent of their share capital without first granting existing shareholders the right of refusal. The decision was taken in the face of unprecedented commercial disruption, enabling companies to shore up their balance sheets as revenues and cash flows dried up. The updated best guidance recommendations state that issuance was to be decided on a case-by-case basis, but we do not know whether this applies to companies that are overleveraged, undercapitalised, or perhaps both.

The dilution of retail investor holdings under the previous constraint of 5-10 per cent was contentious enough, but the emergency measure tipped the balance further in favour of institutional money as many of the subsequent fundraisings have been finalised at hefty discounts to already battered share prices.

The Compass shares, representing 12.3 per cent of its existing issued capital, came with a relatively modest 3.3 per cent discount, but the main point is that the little guy finally got in on the action. The retail element may have only represented 0.28 per cent of the total placing of 195m shares, but it is likely to precipitate similar joint fundraisings going forward.

The emergency change by the Pre-Emption Group may have acted as a catalyst, but the decision to include retail investors owes as much to digital transformation. The retail placing was facilitated by PrimaryBid Limited, a partner of the London Stock Exchange (LSE). The group’s FCA-regulated platform enables investors to keep abreast of when a company is looking to raise capital, together with the related terms. It then allows account holders to subscribe for the offer using a debit card, all of which is achievable through an online app.

Accelerated book-builds have been largely the preserve of institutions, but the Compass placing demonstrates the ability of fintech to even up the lopsided relationship between managed money and retail investors. Time and regulatory constraints have been shown to be overhyped obstacles. And there are other areas where digitalisation could help to redress the balance.

Those of us with capital locked into City institutions have been effectively disenfranchised. By ceding our voting rights we lose our ability to influence the companies to which we are indirectly exposed, with all the attendant negative implications. However, advances in blockchain and web-based technologies have opened up the possibility that we will witness a profound shift in the registrar process, effectively restoring individual voting rights to retail investors in mutual funds.

The Compass placing may represent a genuine sea change for retail investors, but its magnitude also points to the immediate threat posed to the foodservice giant by the ongoing lockdown. After five months of strengthening trading, the group now finds itself in a position where around half of its global workforce is being paid through furlough schemes, although job cuts may now be in the offing. Revenues slowed appreciably through March and nearly halved in the following month as sporting and various other leisure events were cancelled or put on ice. Unfortunately, many of the group’s end markets are likely to be amongst the last to be released from mandated lockdown, so financial pressures will continue to intensify.   

In keeping with many other top-tier constituents, Compass has suspended dividend payments and has pulled full-year guidance. Prior to the placing, part of the proceeds of which will be used to pay down debt, Compass drew down £600m from the Bank of England’s Covid-19 Corporate Financing Facility, while securing an additional credit line of £800m from its revolving credit facility. This should provide sufficient liquidity to see it through the hiatus, but it may be that Compass may need to reorganise or perhaps rationalise its business in response to evolving consumer behaviour and work patterns.

COMPASS GROUP (CPG)   
ORD PRICE:1,114pMARKET VALUE:£17.7bn
TOUCH:1,112-1,114p12-MONTH HIGH:2,150pLOW: 866p
DIVIDEND YIELD:2.4%PE RATIO:17
NET ASSET VALUE:222p*NET DEBT:137%**
Half-year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201912.385240.713.1
202012.577135.7nil
% change+1-10-12-
Ex-div:-   
Payment:-   
*Includes intangible assets of £6.46bn, or 406p a share. **Includes lease liabilities of £929m.