3i Group in $1.1 Billion Rights Issue

LONDON (Reuters) – 3i Group Plc (III.L) Chief Executive Michael Queen took a major step towards overhauling the group’s financial structure on Friday with the launch of a steeply-discounted 732 million pound ($1.10 billion) rights issue.

Queen, who was hired as CEO of Britain’s biggest listed private equity group in January, has made cutting the group’s debt and strengthening its balance sheet his key priority. He told journalists in a conference call that he planned a return to 3i’s traditionally conservative financial structure.

3i said it would issue 542 million new shares at 135 pence, a 60 percent discount to Thursday’s close at 339 pence and a 39.8 percent discount to the theoretical ex-rights price.

“It will strengthen not only our balance sheet but also our market position and will position us well to take advantage of investment opportunities,” Queen said in a statement.

He told reporters he expected to halve net debt to around 1 billion pounds within 12 months, in line with his plan. He added that given the switch to a more conservative approach, he expected that to “fall even further over the next few years.”

3i has already made about 170 million pounds from the sale of a 9.5 percent stake in 3i Infrastructure and a move to take control and gain access to the cash of 3i Quoted Private Equity.

By 0808 GMT, 3i shares were up 13.27 percent at 383 pence. Broker Morgan Stanley upped its target to 375 pence from 350 to reflect its “increased confidence in 3i’s NAV integrity”.

“Queen has made good progress in terms of cutting costs, selling non-core/listed assets and undertaking the QPE deal which has succeeded in bringing down net debt,” said Cazenove.

They said the rights issue and the deal with 3i QPE would push NAV down to 277 pence per share from 496 at end-March, itself a sharp fall from 1,077 pence a year earlier.

“RIDICULOUS” OFFERS

Queen said besides boosting 3i’s capital structure, the rights issue — the third in the group’s 64-year history — would also strengthen its market position. “Prior to the rights issue, we still had 1 billion pounds (in) liquidity; this is no Candover situation. But even if our position was petty robust the perception was we were facing a significantly worse financial position than we were.”

“People were perceiving us as weak and the offers we were given on assets were ridiculous,” he told reporters.

Fellow London-listed private equity firm Candover (CDI.L) is currently in talks with suitors after it ran out of cash to invest in its own 2008 fund [ID:nLO190497].

Queen said that after the rights issue 3i would return to a more conservative financial structure with overall liquidity improving to 1.8 billion pounds.

“For much of 3i’s history we adopted a very, very conservative strategy where we had low gearing and we would balance our cash flow year in and year out. We did not try and supplement our returns through financial engineering,” he said.

“Returns for shareholders will be based on the underlying returns of our investment businesses rather than trying to add to those returns through financial leverage,” he said.

Gearing at end-March was 103 percent, but 3i said the rights issue and effect of the QPE deal would cut that to 42 percent.

He said that despite persistent speculation, he was hopeful non-exec chairman Sarah Hogg would stay for at least two years.

The company also said on Friday that in the year to end-March it had a loss after tax, currency effects and pensions and property effects of 2.15 billion pounds against a profit of 792 million pounds a year earlier. Total assets under management fell to 8.0 billion pounds from 9.8 billion.

The company said that given the rights issue, it would not be paying a final dividend.

J.P. Morgan Cazenove and Merrill Lynch are joint coordinators, bookrunners and sponsors of the issue. ($1 = 0.6666 pound)

By Raji Menon
(Additional Reporting by Cecilia Valente, Joel Dimmock and Paul Hoskins; editing by Dan Lalor and Rupert Winchester)