CRH on a winner with deep-discount cash call

Current Account had got to the stage where it believed that rights issues had gone out of fashion as a funding instrument. But then along comes CRH and springs the biggest cash call to date by an Irish company - and apparently the second biggest rights issue carried out either in Ireland or the UK - without even having an immediate need for the money .

Judging by the initial reaction to the rights issue, when the shares traded well above the exrights price, CRH is certain to be successful in its cash call, and not just because shareholders have the option of buying new shares at a massive discount to the previous share price.

Shareholders will pile into the rights issue in the belief that CRH can maintain its track record of earnings-enhancing acquisitions, probably starting with about €300 million (£236 million) for the Finnish group Adtek in the next few weeks.

Shareholders will be expecting CRH's renewed financial muscle to be put to work to make sure that the new shares do not dilute earnings unduly. But company broker Davy has taken the precaution of pulling its earnings growth forecast from 11 per cent to 8 per cent to reflect the earnings dilution caused by the rights issue.

That said, the size of the rights issue and the near 50 per cent discount to the previous market price is staggering. One must wonder why, given the depth of the discount, CRH felt the need to have the rights issue underwritten by Davy and Warburg.

Mind you, given that this rights issue is not going to involve them in very much risk, with the market expecting a 95 per cent-plus take-up, Davy and Warburg have apparently had to take a sharp cut in their underwriting fees and will now only get a fee of 0.5 per cent, compared to the more traditional 2 per cent fee for rights issues with a smaller discount.

But don't shed too many tears for Warburg and the Davy boys - a 0.5 per cent fee still translates into total fees for the two brokers of €5.5 million. But despite the size of the discount, some Irish institutions will probably not take up their rights as part of the move to reduce their weighting in Irish stocks and the shift to the euro zone. So far, trading in the nil-paid rights does not suggest that any big institutional shareholders have sold their rights, but it's early days and as the three week deadline draws nearer, don't be surprised to see some large chunks of the nil-paid rights changing hands as overseas investors try to top up their holdings through the rights issue.

CRH's move has some short-term implications for the Irish market in general, as some CRH shareholders will undoubtedly unload other Irish stocks to release cash to take up their CRH rights.

For smaller investors the advice has to be take up your rights. It's a no-brainer. You are being asked to stump up €10.50 for new shares, while even after going ex-rights this week the underlying shares are trading at around €18.00.