AWF mulls $12m rights issue in early 2015 to reduce debt

AWF Group [NZX: AWF], the contract labour firm that last year took on debt to acquire white-collar recruiter Madison, will probably launch a $12 million rights offer next year to reduce its borrowings and put some money in the kitty for potential future acquisitions.

The Auckland-based company used debt to fund the $30 million purchase of Madison a year ago and expects to borrow a further $6 million later this month for a further payment after Madison met earnings targets. 

Chairman Ross Keenan told BusinessDesk he is taking a recommendation to the board's Nov. 28 meeting in Christchurch suggesting they proceed with a rights issue at the top end of a $8 million to $12 million range early in the 2015 calendar year to reduce debt and remove an overhang on the share price.

"We still think there is an overhang of concern about us carrying too much debt so the recommendation will be that we now move formally towards resolving a rights issue," Keenan said. "The board thinks that a sensible way of raising capital is to look carefully at what the next couple of years look like, including further acquisitions, so that we could do something with capital raising that still keeps us inside what the investment community believe is safe or credible."

While AWF can service its debt with its cashflow, analysts and investors would like to see the company reduce its ratio of debt to earnings before interest, tax, depreciation and amortisation, he said, adding he had first wanted to wait for confirmation of this month's extra $6 million payout for Madison and also ensure that annual sales for the group are on track to meet the forecast of $200 million, which they are.

Based on the company's forecast for annual Ebitda of $14 million and debt of about $30 million, the debt/Ebitda ratio would be just over 2 without the capital raising. However that ratio would reduce to within the 1 to 1.5 range favoured by analysts by the second quarter of next year should the company go ahead with a $12 million rights issue and continue with its current debt reduction programme, he said.

While a share placement would probably have been cheaper and easier for the company, current shareholders had said they wanted to be able to participate, which made a rights issue the likely choice, he said.

The board had increased the probable value of the offer up from an initial estimate of $8 million to $10 million "simply to give us some headwind in case we want to make a further acquisition," Keenan said.

"We will look at sensible additional acquisitions where they make sense," he said. "They are coming to us all the time now that we have made that acquisition. I'm pushing them back as chairman and the board are absolutely in agreement."

Keenan said both he and the board wanted to confirm the final payment for Madison and shore up the balance sheet before considering further acquisitions.

The board will probably update shareholders on its plans in early December, including confirmation of its outlook for earnings, with a rights issue likely early in the 2015 calendar year, he said.

"I wanted to wait until the earnout was clear and until we had a reasonable chance to update the estimate of earnings for the year, because I wanted to be sure that we were going to perform within those forecasts," Keenan said. "We are tracking pretty well in terms of earnings."

Should the company decide not to make a rights offer, it would continue to use its cash flow to pay down debt, he said.

Shares in AWF advanced 0.4 percent to $2.57, and have shed 12 percent so far this year.

(BusinessDesk)