Another rights issue prospectus at Waterford

Business Opinion: It will interesting to see what Sir Anthony O'Reilly will have to say in the prospectus for the upcoming rights issue at Waterford Wedgwood; its third in 18 months, writes John McManus

When he penned his letter to shareholders in December 2005 he was chipper enough. At that stage shareholders were being asked to dip into their pockets to the tune of just under €100 million by way of a five for three rights issue at six cent to fund the takeover of Royal Doulton.

The shareholders were told that the company had made sufficient progress, both in implementing its restructuring programme and refinancing itself, that it could now consider such a move.

The takeover would have many benefits, not least by way of the efficiencies available from transferring Royal Doulton's production to Waterford Wedgwood's factories and also the combination and rationalisation of retail, administrative and other aspects of the businesses.

Some €47 million of the proceeds were to be used to acquire Royal Doulton and another €20 million was set aside to restructure the new business. The remainder would be available for working capital subject to the refinancing of Royal Doulton. The document predicted that the rights issue would provide sufficient working capital for 12 months.

Sir Anthony told his shareholders that while current trading remained very challenging, the most recent monthly sales figures confirmed an improvement indicated earlier.

The rights issue duly proceeded with almost 75 per cent taken up by existing shareholders and the rump placed by Davy. Sir Anthony and his brother in law, the deputy chairman Peter Goulandris, took up the full entitlement in respect of their 24.61 per cent,

Some six months later Sir Anthony wrote to his shareholders once again, asking them to cough up, this time in a seven for 11 rights issue to raise €101.5 million. Again the price was six cent, a 50 per cent premium to the then share price of four cent.

Despite the great strides of recent years - including the acquisition of Royal Doulton - the company was still in trouble, he told shareholders.

The culprit was the continuation of the extremely challenging trading conditions that featured in the 2004 letter, specifically the weakening dollar and weak demand for Waterford Wedgwood's products. As a result a further round of cost cutting was needed to cut excess capacity, remove inefficiencies and allow the fuller integration of the Royal Doulton and Wedgwood plants which was supposed to have been paid for out of the earlier rights issue.

Some €90 million of the proceeds would be used for these purposes and the remainder for working capital purposes

By way of explanation Sir Anthony offered the following: "the result for the full financial year was extremely disappointing relative to expectations held and assumptions made at the time of the December 2004 [rights] document".

He then went on at some length to explain the need for more working capital, saying that the banks had put a squeeze on the working capital facility, which was linked to a number of performance indicators. The working capital projections contained in the earlier document were not wrong as such i.e. the group would not face a shortfall - in the absence of the rights issue proceeds - provided a number of asset disposals proceeded according to plan. But management would be "compelled to focus on the group's cash management", he told shareholders.

Once again the chairman was upbeat about the future. Trading of course "remained challenging" and sales were down for the year to date. But the group was encouraged by the rally in the US dollar, in which about 40 per cent of sales are denominated. In addition the group took comfort from the strengthening of its order books and the winning of a number of substantial contracts. Uncertainties remained but an improved sales trend was anticipated.

This time round the take was only 31.24 per cent, with Sir Anthony and his brother in law taking up the rest as per the underwriting agreement and increasing their stake - via a whitewash - to 51.35 per cent.

This week the group announced the preliminary full year figures for the year to March. Sales volumes were down 6.5 per cent.

The group also announced that shareholders would be tapped for €60 million by way of a three for 13 open offer. The money will be used to provide working capital while "the turnaround continues and the restructuring is completed". Sir Anthony and his brother in law have already chipped in their share and the remainder of the offer is being underwritten by Davy, who have the option to put any unplaced shares to Sir Anthony and Peter Goulandris in a year's time. The shares are at five cent.

The prospectus "will be issued in due course" and Sir Anthony's letter will no doubt make interesting reading.