Tough times send equity raisings into tailspin

SHAREMARKET woes lopped 17% off Australian companies' equity raisings last financial year, with data revealing a sharp divide between emerging companies struggling for a foothold and their more established rivals.

SHAREMARKET woes lopped 17% off Australian companies' equity raisings last financial year, with data revealing a sharp divide between emerging companies struggling for a foothold and their more established rivals.

The weakness in companies raising money through the sharemarket came despite the tightening of credit markets driving up the cost of the funding alternative - debt - and points to the difficulties facing companies that need access to cash for expansion.

Companies seeking to list for the first time were most heavily affected, with the amount raised through initial public offerings down 42%, from $10.4 billion to $6 billion, according to the Survey of Australian Capital Markets 2007-08, which consultancy KPMG will release today.

Market instability has forced some companies to postpone listings in the face of a market aversion to untried stock.

But the story was different for companies already listed, with the value of share placements up 2% to $19.88 billion, rights issues up 4% to $12.04 billion, and dividend reinvestment plans up 40% to $11.35 billion.

"Irrespective of volatility, if the market sees good value in a company it knows very well and is being transparent with its operations and how it's performing financially, it can go back to key shareholders and institutional shareholders for capital," said KPMG national head of mergers and acquisitions Robert Bazzani.

"Where it's really impacted the business landscape in Australia has really been those strong-growing industrial consumer markets, businesses that are privately owned or would have otherwise gone for an IPO as an exit mechanism or as a way of raising capital."

The growing cost of debt shielded equity raisings from an even greater fall. The highest-profile example was Wesfarmers, which announced in April a $2.6 billion equity raising as part its refinancing of $4 billion debt used for the Coles acquisition. The company initially intended to fund the amount mostly through borrowing, but changed plans when the cost of debt increased.

Gyrations in debt and equity markets have had a substantial effect on private equity, Mr Bazzani said, with funds holding assets in retail and leisure holding back on refloating.

"Those exit strategies are being put on hold," he said. "They're probably being deferred by 12 to 18 months, in which case what you're now doing instead of planning for an exit you are now looking for further acquisitions in those sorts of businesses."

But he said tumbling share prices meant there was good value for funds with cash.

The steepness of the decline in 2007-08 was made particularly stark by the strength of 2006-07, which was bolstered by T3, the $8.5 billion privatisation of part of Telstra.

All up last financial year, $54.19 billion in equity was raised, down from $65.55 billion a year earlier, but up from the $43.69 billion raised in 2005-06.

Despite the cuts to equity raising, Mr Bazzani said there were few signs that companies had cut capital expenditure deeply.

"We're sort of seeing capex hold up pretty well, particularly in the industrial and consumer market sectors," he said.

"CEOs at the moment are really combing through their P&Ls (profit and loss statements) and looking at where their controllable overheads and costs can be trimmed, where cost-income ratios can be managed."

The equity raising -off came in a year when the benchmark S&P/ASX 200 plummeted 17.7% and superannuation funds fell an estimated 6.4% on average.


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