June 10, 2020
Fundraising in a time of Covid-19
Equity fundraisings are a critical moment for the reputation of a company and its leaders. As companies increasingly turn to shareholders for fresh capital during the Covid-19 crisis to shore up balance sheets or take advantage of new opportunities, Philip Walters looks at the communications considerations for business leaders and communications teams to support a successful equity fundraising.
Ten weeks into lockdown and the effective shutdown of the UK economy, many companies have weathered the immediate shock to liquidity and operations from Covid-19 remarkably well, thanks in part to large-scale government support and intervention.
Boardrooms are now surveying the signs of an ever-deepening economic downturn and calculating, as best they can, the likely shape of the recovery. Mounting job losses and the likelihood of shell-shocked consumers keeping their money firmly in their wallets will see formerly strong companies cash constrained. This in turn could restrict strategic optionality, minimise the possibility of emerging from the crisis in a strong position and, in extremis, result in the most vulnerable companies going bust. As we saw during the Financial Crisis we are seeing again now: cash is king. The markets are rewarding well-capitalised companies capable of weathering or taking advantage of the storm to come.
Investment-grade companies can still access debt markets, but for many equity markets will be the cheaper option. Since early February approximately €25 billion of equity has been raised so far by European companies, according to Barclays. On the one hand, this demonstrates the severity of the problem facing companies, but it also shows equity capital is there for companies that can communicate why investors should back them. More fundraisings are imminent, and the well of capital available is not bottomless. Shareholders will become increasingly selective and companies will need to put their best possible case to them to succeed.
A number of equity financing options are open to companies to augment their balance sheets, but each has different communications implications.
Placings have been the preferred avenue during the pandemic. Covid-19 and the need for fast cash have led to rules around placings being relaxed. Companies raising less than 20% of their share capital can now opt for an accelerated placing. There has already been a flurry of placings from the likes of Flutter, Informa and SSP (which subsequently launched a second placing to allow shareholders, including retail investors, to reinvest money the company had to pay out as a dividend). The largest placing so far is £2 billion from Compass. Critics of placings have been vocal in the media about their opposition to what they see as the trampling of pre-emption rights of shareholders, particularly retail shareholders, left on the side lines and unable to take part in the placing, as was experienced by Foxtons. They argue the technology is available to open the placing process to retail shareholders, as shown by Compass and IWG. A backlash is likely if a company is believed to be taking advantage of the rule change and by-passing retail investors, when they are not apparently in desperate need of cash to stay afloat. Balancing speed-to-market against the protection of pre-emption rights for shareholders will be challenging for boards. Successful fundraisings have, in instances, benefitted from wall-crossing cornerstone investors, which naturally raises the risk of unhelpful leaks, as was the case with Compass. Leak preparation is essential for effective containment of the breaking news, consistent message delivery and accurate reporting, and smooth the bridging of communications to announcement day. Timing of the placing announcement, be it before markets open or after close, poses communications challenges and is an important consideration for the communications strategy.
For some companies, the share price has dropped too low for a placing, or their cash requirements are higher than a placing will provide. We have already seen the first Covid-19 rights issue from Whitbread, which is looking to raise £1 billion from shareholders. A rights issue brings with it a plethora of administrative hoops to jump through. It entails greater costs and disclosure, and, importantly, is a more protracted process, leaving companies vulnerable to greater scrutiny and, in a volatile market, to its share price tumbling and its initial discount losing its appeal. Planning and horizon scanning for possible complications are imperative, as is a communications approach that is flexible and fleet of foot in response to the unforeseen.
Regardless of the avenue, there are universal considerations for best practice communications when raising equity capital.
1. A fundraising will shape the reputation of a company and its leadership
While ostensibly a purely financial decision, fundraisings play out in front of broader stakeholders and influence their judgement of the company and its management. It will more likely than not pique the interest of media influencers, whose views can strengthen or undermine the deal. Fundraisings should be regarded as an opportunity to engage with stakeholders and to reiterate the company’s strategy, purpose and fitness for the future. Media relationships developed in calmer periods come to the fore during testing times and should be utilised during the fundraising and kept warm afterwards in order to help communicate the all-important promise-fulfilled message.
An equity fundraising does not come with the explicit financial, operational and remunerative restrictions that come with a government bailout. But they are implicit and scrutinised closely. Future decisions made by management will be judged by stakeholders through the prism of the equity raise, the intensity of which will be determined by the size of the fundraising. Shareholders are dipping into their pockets, while often also missing out on dividends, and will want to see management sharing the burden. We saw during the Financial Crisis the furore that erupted when executives of shareholder bailed-out companies tried to adjust their LTIPs. Changes in remuneration targets after a fundraising perceived externally to make hitting them easier will incur the ire of shareholders and other stakeholders.
The fundraising will also live long in the memory. HSBC’s record fundraising over a decade ago still looms large in its media coverage today. Companies which raised money during the Financial Crisis that look to raise money now will have their subsequent performance used to support or disparage their fundraising. This could be challenging for most companies as only a minority of fundraisings prompted a stronger company to emerge from the Financial Crisis.
2. Messaging on strategy, rationale and use of proceeds is critical
Asking for cash sends a signal to the market. As we have seen already, companies are raising equity for varied reasons. Some are distressed, some are cautiously prudent and, increasingly, some are opportunistic. Companies like Whitbread have been adamant a strong balance sheet would provide flexibility to invest in growth opportunities which otherwise would be closed. Companies must be crystal clear with investors about the rationale for the fundraising and its use of proceeds to build confidence in the transaction and set fair parameters by which management will be held accountable in the future. Demonstration of promises met in the months that follow will also boost support amongst stakeholders for future strategic decisions.
Companies building war chests in most cases do not have identifiable bid targets at the time of the fundraising; by necessity, they ask shareholders to take a lot on trust. Amplifying the track record of management is critical; promises fulfilled in the past indicate they will be in the future. Such opportunistic fundraisings need also to answer why tapping shareholders for cash will provide them with a competitive advantage and outline as best they can the pathway to winning market share.
If a company is distressed, the communications team will need to answer what the plans are for the company beyond survival and counter concerns it will become a slow-recovery investment. For more challenged companies, demonstration of action taken to date from securing waivers on covenants, cancelling non-essential capex, and initiating cost-cutting programmes is necessary to show all possible actions have been taken before reverting to shareholders. It will instil confidence in the fundraising as an additional part of an overall package to shore up the balance sheet.
No one could foresee Covid-19 when they devised and presented their strategies to the market. Companies should, however, consider the fitness of their strategies in light of the pandemic and the fundraising. Despite the challenge of predicting what will happen over the next three months, it is vital companies articulate to investors how they’ve advanced their thinking on the current crisis and its impact on outlook; how they are scenario planning and preparing to operate within this new known unknown.
3. Identify potential weaknesses and devise strategies to address them
As investors become more discerning of the many fundraisings they’re called upon to take part in, so they will weigh up which companies present the most compelling upside, with minimal downside. Companies will benefit from considering potential weaknesses in their armoury early and build convincing counterarguments and communications strategies to tone down perceived downside risk. These potential weaknesses should not be limited to financial stories either; but be considered in the round of a company’s reputation with all stakeholders. Any perceived shortcomings in a company’s behaviour during Covid-19, for example, will likely be dragged up by the media during the fundraising process, overshadowing vital messaging that otherwise would have been conveyed to investors by the fourth estate. If a company opts for a rights issue, the protracted process requires vigilance of the market and timely identification of rapidly emerging critical issues to prevent any undermining of confidence in a successful outcome.
Equity fundraisings are a critical moment for the reputation of a company and its leaders. It will impact how stakeholders judge the business and the future decisions it takes for years to come. Early consideration of the communications and detailed scenario planning will support a successful fundraising. A strategy for communicating milestones met and promises delivered after the fundraising will serve to enhance the standing of a company and its leaders as it navigates the potential challenges thrown up by the testing economic times ahead.