Debts & Loans

After months of speculation, 3i, Britain’s oldest private equity company, finally confirmed yesterday that it was considering launching a rights issue to help to pay down its £2.1 billion debt mountain.

The listed private equity fund released a bald statement saying that it was considering “a range of financing options including the potential issue of new equity”, and little more. 3i is expected to tap investors for between £500 million and £700 million, but the company gave no formal guidance about the size of the rights issue, its price or how dilutive it will be to existing shareholders.

It was also unclear whether the rights issue is an opportunistic attempt to improve the balance sheet, leaving 3i in a stronger position to pick up cheap bargains in a recession, or whether it could have a more sinister interpretation.

Sources close to the company claimed that 3i’s issue, unlike many recent ones, was designed to allow the company to “plan for the future rather than to sort out the past”. They added that 3i’s debt was not subject to covenants.

The doubling of 3i’s share price in the past two months makes it likely that its actions veer towards the opportunistic. But the private equity group’s share price fell 14.46 per cent to 318p after yesterday’s announcement.

On the plus side, there is little overlap between 3i’s shareholder base and that of two of its main private equity rivals. SVG Capital, the listed feeder unit of Permira, had its own rights issue a few months ago, while at Candover, institutional investors have been battered by the plummeting share price. 3i is also trading at a big discount to net asset value (NAV), suggesting that there could be some value in there for investors. Oriel Securities said in a note yesterday that the private equity company was trading at a discount of between 35 and 40 per cent to NAV.

As of yesterday, JPMorgan Cazenove and Merrill Lynch, 3i’s brokers, which are reported to be underwriting the rights issue, had not even started talking to investors. They are unlikely to sign on formally to underwrite the deal without assurances from some of the leading institutional investors that they will agree to take a portion of the rights issue, known as sub-underwriting.

Indeed, it is far from clear at this stage that 3i will even go ahead with the rights issue. If its share price continues to fall, it will be forced to offer an ever steeper discount to NAV to get shareholders interested and it could decide that it is easier to abandon capital-raising. It is too early to buy the shares. Hold.

UK Coal

UK Coal is something of an oddity: a company with extensive property assets – about 46,000 acres of land – whose book value has not fallen year-on-year. As yesterday’s full-year results from the miner show, the value of its portfolio has held steady at £422 million on a like-for-like basis. That is significantly worse than in previous years, as it enjoyed a £69 million revaluation gain in 2007, but creditable given writedowns in the wider property sector.

UK Coal’s advantage is that it is making steady progress in gaining planning permission for undeveloped sites, while also benefiting from the strong price of agricultural land.

But it was developments on the coal side of the company that gave greatest encouragement. With many of UK Coal’s legacy fixed-price supply contracts due to expire shortly, it has signed new deals with three existing power generation customers and one new one: Scottish & Southern Energy.

The revised terms feature cap and floor arrangements, which provide exposure to coal price rises from their present depressed levels, while also including substantial prepayments.

This means that UK Coal can use the cashflow, about £100 million over two years, to fund the development of its Kellingley and Thorseby mines, rather than to add to its £150 million debt burden.

The company is likely to remain lossmaking this year – to the tune of £18 million at the pretax level on Numis Securities’s estimates. However, it is UK Coal’s attraction as a medium-term asset play that gives reason to hold on.

ACS

Anyone who held shares in Computer Software Group needs no introduction to Vin Murria, the livewire chief executive who invigorated the AIM-listed software developer (making 16 acquisitions in less than five years) and secured investors a tenfold return on their money when she sold out to private equity in 2007. It was that track record that prompted the selection of Advanced Computer Software, Ms Murria’s second consolidation vehicle, in this year’s Tempus Ten.

At last week’s 26p, shares in the healthcare IT specialist were up 44 per cent on the year – making it the portfolio’s best performer. Yesterday’s maiden full-year figures helped to explain why. Six months after its purchase, Adastra, ACS’s first acquisition, is already responding to treatment. Underlying sales at the company, whose software links patient databases used for out-of-hours care back to GPs surgeries, were up 29 per cent and operating profits ahead 142 per cent.

The task now is to extend Adastra’s reach into adjacent niches where patient record-keeping requires automation: walk-in treatment centres, domiciliary care, ambulance services and the like. In the interim, ACS has £14.7 million of cash and scope to raise plenty more, to fulfil its acquisition plans and provide the next leg-up in profit growth. At 27½p, the shares are trading 12 times 2011 earnings if the cash is ignored. Keep buying.