Hughes Drilling's (ASX: HDX) A$18.5 million placement and acquisition of its rig provider Reichdrill Inc. for US$8.9 million are transformational for the company as it moves from being a pure growth stock to a growth and yield stock.
Chairman Robert Hackett told Proactive Investors the placement to existing shareholders and new institutional and sophisticated investors in Australia and overseas would turn the company's balance sheet considerably more conservative.
This - together with the increase in operating cash flow - would enable the company to turn into both a growth and yield stock.
Beyond that, the placement of 57.8 million shares priced at A$0.32 each will also double the free float of the company's shares and transform Hughes from what has essentially being a retail stock to one weighted more towards institutions.
It will also lift its market capitalisation from the sub $50 million level, which tends to fly under the radar of investors, up towards the $100 million level.
This would likely attract the active interest of more investors in the company.
"There would also be a positive perception shift arising from the Hughes family holding post capital raising diluted interest of 39% from the previous 58%," Hackett added.
Touching on the acquisition of Reichdrill, Hughes' largest single supplier, Hackett said the deal was earnings accretive with the US$9.8 million price reflecting a sensible multiple of profits on sales to parties other than Hughes.
He also noted that the cash margin that Hughes will retain on the sale of rigs by Reichdrill to Hughes would pay for the transaction over less than four years.
This follows on the company saying the acquisition is expected to be earnings accretive on a normalised 12 month basis and after the accounting elimination of profits on sales by Reichdrill to Hughes.
Placement and acquisition
Hughes will carry out the $18.5 million placement in two tranches, with the first of 30.6 million shares to raise $9.8 million to be issued on 21 March 2013 while shareholder approval will be sought at a general meeting on or about 22 April 2013 for the second tranche of 27.2 million shares to raise $8.7 million.
This will be used to acquire Reichdrill at a price that is about equal to that of 4.5 blast hole rigs as well as acquire additional rigs.
Hughes currently has a fleet of 35 rigs.
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