Coronavirus forces WH Smith to tap shareholders for cash

WH Smith prepares to raise cash as coronavirus takes it toll

WH Smith has raised cash from shareholders so it can secure new lending facilities and bolster its balance sheet as the coronavirus pandemic forces retailers to shut up shop.

The newspaper, book and stationery seller said it could secure a new £120 million debt facility but only if it raises cash from investors too. This means it has issued 15.8 million shares at £1.05 each. That will cause significant dilution to existing shareholders as the shares issued represent 13.7% of the company’s enlarged issued share capital.

WH Smith, like many others, has seen its share price collapse as a result of the coronavirus pandemic. The stock has fallen by 59% since the start of the year and is trading at £1.0758, pushing its value down to just £1.2 billion. The placing was priced at £1.05, representing a slight discount.

The company last raised cash in October 2019 when it was in the process of buying Marshall Retail Group (MRG) for £312 million, which was funded by both debt and equity. WH Smith raised £155 million from institutional investors that bought around 7% of the business after paying £2.15 per share, a slight premium to the share price at the time.

Whilst the last funding round was all about expansion, the latest one is more about survival. The slump in WH Smith shares has enticed investors that believe in the long-term future of the business, which the company says remains sound. But there is no clarity on how long the coronavirus will weigh on the retail sector, travel hubs or WH Smith.

Still, WH Smith is confident that this will provide enough of a cushion for even the toughest of circumstances. ‘These financing arrangements, coupled with a broad range of mitigating actions to manage the cost base and cash flow, will provide sufficient liquidity to deal with this most challenging of trading environments,’ said WH Smith.

How is the coronavirus impacting WH Smith?

The company has managed to keep over 200 stores that are in hospitals or contain Post Offices, but this is only handful of its 1160 UK stores.

WH Smith has been successfully shifting its strategy toward opening more shops in busy travel hubs that usually guarantee traffic, like airports and railway stations, but transport in the UK and elsewhere has been brought to a halt. Its main overseas market is the US, where it has been expanding its presence in airports and transport centres through the acquisition of travel retailers InMotion and, more recently, MRG.

WH Smith is set to report interim results on 22 April. These will cover the six months to 29 February 2020, and the company is expecting to meet expectations as this was before the UK, US and other countries started to introduce lockdown measures. It has already revealed it will post a 7% increase in revenue and a 1% fall in like-for-like (LfL) sales, as strong growth in travel stores continues to offset falling sales in the high street.

The outlook beyond that is, understandably, uncertain. WH Smith said on 12 March that it expected to lose £100 million to £130 million in revenue and for underlying pre-tax profit to take a hit of £30 million to £40 million in the year to the end of August 2020. However, that was issued before the UK formally entered lockdown.

What about WH Smith’s dividend?

The usual safety of the dividend will be questioned as more stocks decide to postpone or cancel shareholder payouts so they can hoard cash and keep their businesses alive. WH Smith has returned over £1 billion to shareholders through dividends and buybacks since 2007 but it will be hard to justify distributing cash to investors while simultaneously raising debt and equity to keep the business afloat. WH Smith had already stopped buying back shares from investors before the coronavirus emerged as it prioritised paying down debt after the acquisition of MRG, but it had said it would pay out £63 million in ordinary dividends in the 2020 financial year.

WH Smith underlines the fragility of retail sector

The coronavirus has brought many industries to a halt, and retail has been one of the most severely affected as social-distancing and lockdown measures force most shops to shut for the foreseeable future.

Most retailers will have no cash coming through the door so long as coronavirus keeps disrupting day-to-day life, but they will still have rent and other outgoings to pay. With this in mind, WH Smith is fortunate that it has been able to keep a couple of hundred stores open. Some B&M stores remain open because of its, albeit limited, food offering, as do Pets at Home outlets.

For those unable to keep their bricks-and-mortar stores open, the virus has tested their online capabilities. Companies like Amazon have become vital in a world where practically everything has to be bought online. Retailers including JD Sports, which has had to shut virtually all of its international network of stores, has been trying to sell more goods online. However, the virus has also exposed those that were either unprepared for a dramatic shift to online or an inability to adapt. WH Smith, which relies on selling snacks and magazines to people on the go, isn’t a business that can be taken online.

How to measure and trade coronavirus volatility

WH Smith is the first retailer to tap investors for cash as it looks to build its financial strength in preparation for an uncertain future, but it will not be the last. Only two members of the FTSE 350 General Retailers Index, JD Sports and Dunelm, boast more cash than debt. This means most are already loaded up with debt and will have to rely on what headroom they have using existing facilities, securing additional credit lines, or raising cash from shareholders. This only raises the likelihood that investors in retailers will have to sacrifice their dividends and buybacks as the sector tries to minimise outgoings and hoard cash to weather the storm.