Debt forced Wearne hand

Johannesburg - WG Wearne, the construction materials company, had no choice but to launch a R30.9m rights offer or face extinction after more than a century of trading.

So said analysts following an announcement that Alt-X listed WG Wearne unveiled plans to issue 77.2 million ordinary shares in an effort to recapitalise its balance sheet.

"I don't think it had a choice given its debt profile and the pressures banks are probably giving it," said Stanlib fund manager Lance Krowitz in an interview.

WG Wearne embarked an aggressive expansion drive at the top of the bull market. "All of a sudden things slowed down and turnover reduced, but debt didn't," said Krowitz. "It needs the money from this rights offer to help with working capital and cash flows.

"Banks have probably said 'raise money from shareholders or shut down'," said Krowitz.

WG Wearne CEO John Wearne told Fin24.com most of the acquisitions were financed with debt, and as a result of the downturn they didn't generate the cash they were expected to. "The rights issue is what we need to put extra working capital into the business," he said.

Hedging decision under fire

Said Imara SP Reid's Stephen Mentjies: "It considered raising money a better alternative than flogging plant at rock bottom prices."

Wearne family members, directors and associate companies will take 57.5 million of 77.26 million shares being issued at 40 cents per share in the group's rights issue.

The issue price is about half of net asset value after the issue.

The announcement shows the net tangible asset value before the rights issue at 96.7c, declining 17.6% to 79.7c after the rights issue.

"They're going to foot the bill, which staves off the worst-case scenario of liquidation," said Krowitz.

"They are in a very tight spot. Interest rates have come down a bit, and we haven't seen an improvement in conditions yet," said Vega Asset Management director Francois du Plessis. "It's a great pity if the company goes into liquidation after having a 100-year track record."

The company caught a lot of negative attention from the investment community because of the hedging decision. "They went out and hedged fuel right when the oil price peaked [at over $140 a barrel]. Airlines get that wrong, not aggregate companies," said Du Plessis.

- Fin24.com