Mitie PLC – Would you and should you ‘swing the bat’ now at 40.5p?

I am more interested in the potential short term capital gain on Mitie at the moment rather than any income/yield/dividend angle. This looks like the low point in the shares during their current rights issue. Let’s draw a line in the sand at the current offer price of 40.5p and see what sort of upside we can see from here.

As a reminder, Mitie are buying the Interserve Facilities Management business and passing the hat around with a rights issue which is 11 new shares at 25p for 5 old shares. The old shares are already ex rights as of Tuesday the 14th July (the shares did not ‘crash’ 40% on that day, as some ‘comics’ are suggesting - they were merely ex-rights on that day!). The new Mitie shares will represent a not insignificant 68.8% of the enlarged share capital but Interserve will end up holding 23.4% of that equity (in case you were wondering, there is a 90 day lock up on selling any of the consideration shares and a phased lock up, in potential tranches, after 91 days, see page 110 of the prospectus). It’s a fully underwritten rights issue to raise ￡190 net of expenses. Mitie have also extended their ￡250m revolving credit facility until December 2022.

As usual, there are about 30 pages of ‘risk factors’ in the prospectus but we are now at the peak period for the technical situation in the rights issue and to a lesser extent, the ‘uncertainty’ as to the level of rights issue take up.

Currently, shareholders in Mitie need to get their ducks in a row over the next few days. They will need to decide on their take up, sell any of the nil paid if they want to ‘“tail-swallow” and make sure they have their funds transferred and available to pay the call at 11am on the 28th of July. If you can see the section of the timetable below that I have cut and paste from the prospectus there are some mechanics to navigate currently.

When I look at Mite, all this should not be too problematic as the shareholder list is fairly concentrated amongst institutions with professional back office facilities. Silchester hold 17% of the shares and the whole list below represents about 42% of the Mitie equity prior to the rights issue launch.

With the call due on Tuesday the 28th of July any remaining rump of the rights issue that has not been taken up will be placed by Jefferies and JP Morgan Cazenove et al on the following morning. This is the very compressed part of the time table. The majority of the subscriptions for the rights issue will come in on the morning of the 28th. The approximate size of the rump will not be known until the afternoon and the precise number will be announced first thing on the flowing day, the 29th. Jefferies and JP Morgan should be able to place the rump swiftly by about 9-9.30am on the 29th.  

Any technical aspect to the rights issue or market ‘indigestion’ will then be a thing of the past. Stock market history. If you look back at past announcements in relation to UK rights issues the take up rate is normally over 95%. I do not actually see much ‘uncertainty’. This is the main point I am making – if you think the low point in the shares is the placing of the nil paid then you are likely to miss that low point and I would go further to point out that the placing of the rump is a risk reduction exercise by the brokers, they just want to get it done and squared away. If you are an institution and miss the brokers’ phone call you miss the rump and given that the rump is likely to be small, any institution that really likes the deal and wants more shares from the rump is likely to be scaled back. The scene is then set for a share price bounce over the two or three weeks.

Beyond the short term I have outlined above, you can make up your own mind. One of the main aspects that discouraged potential shareholders of Mitie in the past was the significant amount of debt they had. This was ￡168m at the 31/3/20 but the rights issue on its own and without Interserve would move the needle to a pro-rata net cash figure of ￡22.1m at that date. The Interserve acquisition cost is about ￡271m of which ￡120m is in cash and the balance of about ￡151m is in new shares. I had to wade through to page 110 of the prospectus to find out that “Interserve Facilities Management will be delivered cash-free/debt-free and with an agreed normalised level of working capital”.  So it looks like debt should also be reduced to about ￡100m pro-rata.   I have seen very little by way of brokers’ debt and earnings forecasts but I would have thought the rights issue in isolation could dilute eps by 50-60% but merging the Interserve support services business with Mitie could in turn enhance earnings by nearly 30%. Mitie had a historic PE in high single digits only, so I find it difficult to see how we could come out the other side of the rights issue with a perspective PE of over 10X.