Centrica is passing the begging bowl around investors in the hope of raising 750 million pounds ($1.4 billion). The market is showing no mercy.
The British utility has been hunting buyers for about 350 million new shares -- about 7 percent of its existing share count. It plans to use 400 million pounds of the proceeds to cut debt, and the rest to fund two specific acquisitions. Investors have recoiled, sending the stock down as much as 11 percent in a stand-off over what price they're willing to pay for the new stock.
A fall in the share price would be normal in the circumstances. Any issue of new shares briefly pushes supply above a stock's natural level of demand. But the reaction here is severe. If investors believed Centrica would deliver them a good return on their cash, they would lap up the offering and accept a smaller discount to the prevailing closing price.
Why the hostile reception? Increasing Centrica's share count will dilute earnings per share by about 7 percent in the first instance. True, the group will save a bit on its interest bill by cutting debt, and get new earnings streams from the acquisitions. But it's not clear when per-share earnings will return to their previous level.
The fact is investors loathe dilution. Trimming net debt, currently 5.5 billion pounds, by 7 percent and doing two tiny deals don't immediately look like good enough reasons for inflicting such pain. That may create suspicions that Centrica has other worries.
Worse, investors just didn't see this coming. Investors hate shocks as much as dilution. There were no clues in Centrica's full-year results or trading statement. While a hint at the desire to strengthen the balance sheet could have knocked the shares too, the market could at least have got used to the idea gradually.
Centrica's management seems to have ended up between a rock and a hard place. Had it taken no action, a cut to its credit rating could have taken place imminently. That too would have hurt the shares. Other companies worried about their credit ratings will look at Centrica's plight and want to take as much pre-emptive action as possible.
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