AO World Shares Down 5% On Capital Raise It Said It Didn’t Need

AO World (LON: AO.) shares are down a couple of percent this morning as the company raises capital that it said it didn't need as recently as Monday. This can be taken in different ways of course. One is that if they need to raise capital then the business is not as solid as we might have thought – or even they said. On the other hand, being able to raise substantial capital – £40 million and change – shows that the institutions still buy the basic story about the business. This leaves the decision over which part of the story to believe open.

The background to this is, as we reported about AO World shares, that the credit insurance for suppliers to the company had been cut. AO. announced that this was, well, it was just a return to normal after the expanded credit insurance limits allowed given the expansion of the business in lockdown. As volumes fell again – as we all know they would – so that cover has been wound back in.

All of which could be entirely true of course. But after those insistences on Monday about entirely satisfactory working capital and credit limits to come back on Wednesday with a share issue is, well, it's a little odd. But that's what AO World has done: “The new Ordinary Shares issued pursuant to the Placing and the Primary Bid Offer (together, the “Capital Raise”) are intended to raise gross proceeds of approximately £40 million. The net proceeds of the Capital Raise will strengthen the balance sheet and increase liquidity”. If everything's hunky dory on Monday then why this by Wednesday?

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The question for us as traders is, of course, what happens next? Which means working out what has just happened to a great extent. It is possible to think that Monday's announcement of “no problems here Guv'” has just been disproven. If they need to raise another £40 million in capital this quickly, well, that reduction in credit insurance must have hurt. It's also possible to read this the other way though. For a cut in credit insurance lines has proven the killer of many a retail business. So, it's necessary to do something to quiet any rumours that might arise. At which point being able to raise £40 million in capital from institutions shows that the market as a whole still has confidence in AO World.

Which of those we wish to believe, well, that's up to us individually. What is worth noting is that the share offer is at 43 pence, which is only a 10% – ish discount to last night's closing price of 47 pence. That's a pretty tight margin for a bookbuilding exercise. So, the market would seem to think that the current share price is something of a bottom for AO World. Whether this is actually true or not is another matter of course but it is the conclusion we should probably draw from that discount on the new shares.