Michael Queen is wasting no time in addressing market concerns about debt levels at 3i, Europe’s largest listed private equity company.
Fresh from selling a £60m stake in its infrastructure fund, Mr Queen has now launched a bid for another 3i spin-off – its Quoted Private Equity fund.
QPE has one attraction – £243m of cash. In order to get its hands on the money, 3i is having to bid 50p a share in cash plus 0.1706 of a share for the 55% of the company 3i does not already own.
Once everything is netted out the deal, which will be affected by a voluntary solvent liquidation because of QPE’s Jersey domicile, will bring £110m into the 3i coffers.
This will take the amount of cash raised since Christmas to £270m and go some way to easing investors’ fears about 3i’s borrowings. Net debt is currently £2.1bn, a legacy of the decision by former boss Philip Yea to borrow a truck load of cash at the top of the cycle to fund a share buyback.
Some £500m of debt and £1bn of capital calls potentially fall due in the next three years, against £839m of cash deposits and undrawn banking facilities.
Monday’s deal will help reduce that gap, although Queen still has a lot more work to do as analysts at Merrill Lynch noted on Monday: Coming just after the disposal of part of 3i’s stake in its infrastructure subsidiary, this deal shows 3i’s new management moving purposefully to de-gear the balance sheet. This is not a “with one bound they were free” solution to these issues, but it does, we think, take the pressure off management to make other disposals quickly.
And here’s the view of Iain Scouller at Oriel Securities.
We calculate that 3i has indicated net cash inflow from asset sales in the past week of almost £200m taking into account the QPE transaction together with the sale of shares in 3i Infrastructure and Morse. We expect further asset sales in the weeks ahead from both quoted investments and the Venture Capital portfolio (£655m value at 30.09.08), SMI portfolio (£228m at 30.09.08) together with some unquoted buyout and growth capital investments. We believe that as asset sales continue and leverage is reduced there is scope for a recovery in the share price and reduction in the discount the shares are trading on to NAV.
Debt, of course, is not the only thing Queen has to worry about. There is also a portfolio of mid-market buyouts to give him sleepless nights.
But there is one big winner from Monday’s move – the Crystal Amber Fund, which is run by former Schroder Securities analyst Richard Bernstein.
This activist investor took a 3.2% stake in QPE earlier this month, attracted by its cash position and the fact that the shares were trading at a big discount to net asset value of 88p.
Shares in QPE are currently trading 19p higher at 85.5p.
Related Link:
Lady Hogg to step down as 3i chairman – FT.com