Webjet (ASX: WEB) is doing a capital raising, is it dirt cheap?
What is Webjet?
Webjet is a digital travel business spanning both global consumer markets (‘B2C’) and wholesale markets (‘B2B’). It was established in 1998 and now claims to be the leading online travel agency (OTA) in Australia and New Zealand. Webjet says it was the world’s first to use ‘Travel Services Aggregator’ technology and is now leading the industry in blockchain innovation.
What’s happened?
COVID-19 caused such a shutdown of global travel that Webjet decided it had to do a capital raising to make sure it survives during this period.
After being in a trading halt for over a week, we learned about the capital raising details yesterday. Even before the capital raising, the Webjet share price had been sent lower by 72%.
What you need to know about the capital raising
Webjet was aiming to raise at least $275 million from investors by selling shares at an offer price of $1.70, a discount of 32.2% to the ‘theoretical ex-rights price’ of $2.51 (according to Webjet). Now the company is saying it’s will look to raise $346 million from investors.
Under the offer, eligible shareholders will be able to buy 1 new Webjet share for each share they already own. Of course, there is an offer for institutions and smaller, retail shareholders.
Institutional offer
Initially, the company planned a fully underwritten institutional placement to raise $101 million. Webjet announced this morning this was increased to $115 million. It also planned to offer a partially underwritten entitlement offer for investors to raise a minimum of $174 million.
Webjet said this morning the institutional placement raised $231 million, with the entitlement offer for existing institutional shareholders raising $115 million. Bain Capital alone subscribed for $25 million worth of shares.
Retail investors
The regular investor offer (for people like you and I) will open on 8 April 2020 and will close on 21 April 2020. They too will be able to buy 1 share for every Webjet share they own at $1.70 per share.
“We are delighted with this strong demonstration of support from both our existing and new investors,” Webjet Managing Director John Guscic said.
“This equity raising provides Webjet significant liquidity to navigate the near-term uncertainty created by COVID-19, and importantly positions us to continue our leadership in our global WebBeds business and Australian OTA.”
What is the money being used for?
Webjet says the proceeds from the raising will be used to strengthen the balance sheet because of the continuing COVID-19 impacts and government restrictions which are still impacting global travel.
The amount raised will be enough to provide for operating costs and capital expenditure through to the end of 2020, which assumes severe travel restrictions continue. Net debt will be reduced from $135 million to a net cash position of $140 million.
This capital raising will also mean Webjet is well placed to do well after this period is over.
Webjet is working on an initial cost reduction program and further costs can be reduced if required. There have been 440 redundancies and the boards & executives have reduced their pay, including a 60% pay cut for the Managing Director. Most staff have been reduced to four working days.
Currently, Webjet says there is no marketing spending, no non-essential spending and contracts are being renegotiated.
“We provide an essential distribution channel in the travel sector and anticipate we will play an even more valuable role connecting our clients and hoteliers in a recovering environment and as travel volumes return in the future,” Guscic added.
Is Webjet a buy?
In early trading, the Webjet share price fell to under $3. For people able to take part in the capital raising, I think the $1.70 price looks very, very attractive. The Webjet share price is currently at $3.35 — meaning it’s almost double for investors who can take part in the capital raising. I’m less inclined to buy straight away at $3.50.
We don’t know how long travel is going to be affected by COVID-19. Even when global travel is opened up again, I don’t think things will return to normal instantly. So it’s very hard to make any medium-term earnings predictions with any certainty.
For people willing to think long term I think Webjet could be good, volatile buy today. But there are plenty of great shares that aren’t as risky, but still could create huge returns like these tech shares…
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Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.
