over 3 years ago • 2 mins
Two of the biggest names in European aviation are gearing up for controversial “rights issues” in a bid to bolster coronavirus-hit finances – and that may represent a buying opportunity… 👀
International Airlines Group (IAG), owner of carrier British Airways, recently announced plans to sell – subject to shareholder approval next month – an extra $3 billion worth of stock to those investors. And aerospace engine-maker Rolls-Royce looks likely to follow suit, with a $2 billion rights issue of its own reportedly in the works.
Tumbling demand for global aviation has forced both companies to cut thousands of jobs, with reduced revenues requiring them to come up with cash from elsewhere. Giving existing shareholders the “right” to up their stakes at a discount price is a fundraising avenue all sorts of businesses have explored lately, and one airline **EasyJet **has gone down already this summer 😛
As readers of our Analyzing Financial Statements Pack will know, more shares but the same amount of expected future profit means a lower per-share value – a phenomenon known as “dilution”. But with IAG reporting a $2 billion loss last quarter and predicting aviation won’t return to pre-coronavirus levels until 2023, a key question is whether there’ll be any profit around to share…
If there is profit to be had, then depressed stock prices could represent an opportunity. Both Rolls’ and IAG’s shares have lost over two thirds of their value this year to sit at their lowest level in a decade – but their respective pre-pandemic positions may be a clue to what happens after its effects begin to subside.
Rolls has experienced recurring problems with the key engines it supplies for Boeing 787s as well as a series of interminable restructurings – culminating in its debt being reduced to “junk” status. IAG, on the other hand, turned a $1 billion quarterly profit this time last year, and some think effective cost-cutting could get it back to profitability as soon as 2021.
Major activist investor ValueActdoesn’t fancy Rolls’ chances. The company’s former largest shareholder sold the remains of its stake last week, reportedly taking a 20% loss on its investment. Depending on the level of discounting and dilution on offer in its right issue, however, IAG may be better placed to use this “cash call” on investors as a way to build a firmer financial runway for its business – and its share price – to take back off ✈️
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