Key points:
- McColl’s Retail has had to make a release to the market following press speculation
- There has been an offer for the group, since withdrawn
- This quarter's results are likely to be worse than expected
- McColl’s has used up most of that last capital raise
McColl’s Retail (LON: MCLS) shares are down 56% this morning on the back of a release to the market. There had been substantial press speculation about what was happening at McColl’s and this is what a company is supposed to do, explain what is happening. What has actually been happening is not good, thus that significant share price fall.
There’s an art to reading statements like this one released by McColl’s Retail this morning. That art being to concentrate on the little things just mentioned as by the bys, rather than the expansive verbiage given to the good things. So, McColl’s is rolling out the Morrisons Daily concept across the estate. This is producing an uptick in revenue and margins, which is good of course. Trading for last year – for the results coming soon – was around expectations. So, there’s good stuff in there.
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McColl’s also tells us of some bad stuff. Trading in the first part of this current quarter was not good – omicron etc – and so results will be below current expectations. Further, they’re still discussing with the banks how they’re going to deal with the debt burden but the banks are being nice about it etc. Bad stuff but not terrible stuff that is.
But then we get what could be considered to be much worse. “….recently received an approach for the whole business, which has subsequently been withdrawn” One way to read that is that someone thought it worth making a good enough offer that they could see the detailed management accounting books. Then retreated in horror – that’s not a good sign. There’s also this “The balance of these funds was to be used to enhance the Group's working capital headroom. However, the trading shortfall in the second half of FY21 has absorbed this headroom” That last capital raise is now all entirely deployed, there’s no room nor margin for error again.
Which leaves us with this important part of the statement from McColl’s “The Group continues to believe that a financing solution will be found that involves its existing partners and stakeholders”.
The actual business itself, that’s doing OK. The strategy of moving to Morrisons Daily works. However, the capital structure of the group is such that it’s no extra working capital, a big debt burden. When someone took a close look at the books they said no to buying the whole of McColl’s. A solution will be found – debt write downs maybe, a capital raise possibly. But there aren’t going to be debt writedowns without shareholders taking an awful lot of pain. A capital raise at these prices would be grossly dilutive.
The claim at least here from McColl’s is that the business is fine, but the capital structure isn’t. So, more money will have to come from somewhere. Thus the 56% fall in the McColl’s share price. At some point that share price does become just option money on a solution being found. It’s not obvious that this is that point yet but working out where the bottom is should be the trading strategy.