Capital Raise Dilution Effect

Summary

• In my previous article I mentioned the capital raise is relatively neutral for the shareholder as it is a rights issue. That is not correct.
• Recurring results per share and yields get diluted and the discount to net asset values is also diluted.

As this raise from URW is to be made with rights I came to the false initial conclusion that impact for the shareholder is relatively reduced. In a rights issue you are covered regarding price. No matter what the price is you are always guaranteed you can participate in it.

Sometimes you think stupid and there is no point in trying to hide it because no matter how protected you are from the price of the capital raise nobody covers you from the effect in value.

There is no sensitivity to the price of the capital raise it is just the raise itself that dilutes, obviously, the profitability of the investor as the net capital invested is increased.

The company will be issuing new capital to invest it in 1.6% yielding asset, its debt, so the high yield from recurring income that the company would generate has been diluted significatively.

Capital Raise Effect

The discount in NAV, measured now by the Net Tangible Value (NTV) will be diluted because the base for the discount has been increased. Both NTV and market cap increase in the same amount but since both figures are larger the discount becomes less significant.

Unibail was trading at €40 before the announcement. This implied that the shareholder could buy all the equity of the company for €5.5Bn. This investment would produce in the scenario I presented in my last post a recurring income of €982Mn in 2020, which implies a yield on the investor investment of 18% (22% if we consider €32 as the reference share price).

After the capital raise, the capital required to buy the whole of the company will be €9Bn while the recurring income will raise only marginally from the reduction in debt and interest expenses.

Capital increases by a factor of 1.6x and yield gets reduced from 18% to 12% in 2020, or 28% to 18& in 202.

At the same time the base to calculate the discount to NAV has got bigger so the discount gets also diluted. NAV increases in nearly the same amount as the market raise (adjusting for capital raise costs) but the resulting discount is smaller, no matter what the price of the capital raise is.

So what is the discount now and the expected yield.

At €31, as it is trading right now, the implicit discount to the expected NTV in my reviewed scenario and after the capital raise is being taken in account is an interesting 57% equivalent to a 2.3 times potential for revaluation. The discount is good but obviously not as great as before.

The yield that the recurring earnings of my scenario would imply at €31, after the capital raise has taken place, are 13% for 2020 and 21% for 2021. Again, they are good for the kind of assets URW has but they are not as great as before.

Conclusion

I will keep my investment in Unibail but I will not double down on current prices as I felt I would do after my previous post. In the long term, a 21% yield is great but in the short term the investor in Unibail is now assuming the risk others do not want because there is a risk of not knowing what is the final COVID impact in the retail assets of the URW and the economy in general.

The potential that I thought there was of an NAV that is 3x the share price has been diluted to 2x. It is good enough but not as great as to double down my initial investment.