3i in distress, please give generously

May 8, 2009

REUTERS– Neil Collins is a Reuters columnist. The views expressed are his own –

Were 3i a normal investment company, its directors would be laughed off the board if they proposed raising new equity at a whacking great discount to net asset value.

Upbeat noises about a strengthened balance sheet, future access to the debt markets (sic) or the glittering new investment prospects ahead wouldn’t make a blind bit of difference. The board would have to go.

Fortunately for chairman Sarah Hogg and newly-promoted chief executive Michael Queen, 3i long ago stopped looking like a normal investment company, preferring the excitement of private equity, gearing up and returning capital to shareholders.

So they will get away with what is, in effect, a rescue from those shareholders who haven’t taken the money and run. At ruinous cost in fees (32 million pounds) and dilution (39.8 percent discount to the theoretical ex-rights price) they are invited to put up 732 million pounds by buying nine new shares for every seven they own, at 135 pence apiece.

Never mind that the company itself reckons its assets are still worth 496 pence a share — a massive 54 percent drop on a year ago — it would rather the shareholders bore the cost of its mistakes. Trying to realise some of the exciting assets in the four billion pound portfolio instead is just too painful — in other words, the forced sale value in today’s markets is much less than 496 pence a share.

Given the hole that 3i is in, there was probably no other way out, which is why the shares rose in relief to 385 pence on the news. But the directors dug the hole, and failed to see the danger of the debt repayments collapsing in on them.

Shareholders will be forgiving in the extreme if they don’t insist on more radical changes at the top in return for their sacrifice.

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