Blackfriar: Pain will be gain in long term, WYG shareholders hope

The embattled design and engineering consultant is once again returning to shareholders to tell them they face a hefty dilution of their stakes as it seeks to rebalance its finances.

Last time the Leeds-based company did this in late 2009, a debt-for-equity swap left its lenders Lloyds, Royal Bank of Scotland and Fortis holding 60.5 per cent of its shares. Shareholders were left with 15 per cent of its equity, and an employee benefit trust took the remaining 24.5 per cent.

At the time WYG’s new management hailed the capital restructure as a new dawn for the company. But less than two years later and WYG has returned to the markets to say it wants to raise £30m from new shareholders through a placing, which will mean “very significant” dilution of existing shareholders.

No figure was put on what current shareholders will be left with, but finance director David Wilton’s comparison of the restructuring to a new IPO shows how different the group’s new ownership structure will be.

“The reality is it’s the best deal for everyone,” said Mr Wilton. “If and when we do this deal we have got a very strong business with a significantly stronger balance sheet.”

Painful though it will be for shareholders, WYG had very little choice but to go down this route.

Its banking covenants tighten at the end of the month and the company would be likely to miss them at a test date in August.

Its lenders have given their non-binding commitment to the restructuring.

They too will face hefty haircuts on their debt, but their acceptance suggests a realisation that this is the best they will get.

“It’s better for the banks to try to keep them in business than to let them go bust,” said Geoff Allum, support services analyst at Arden Partners. As a people business, banks recognised that pulling the plug on WYG would leave them very little by way of assets to liquidate. The lenders’ best bet was to give the group a fighting chance of growth.

If and when the deal goes through, the group’s net debt of £29.2m will turn into convertible shares, leaving WYG with a cash positive position from which to build. Another £30m of preference shares will be converted into deferred shares.

WYG insists the second restructuring was always planned, and it can only grow once it has a firm financial base to work from.

“People won’t buy something until it’s fixed,” said Mr Wilton.

Blackfriar believes WYG would undoubtedly have liked to avoid this second painful restructuring, but its board has done its best faced with a dire market.

The group’s results, published along with the restructuring announcement, showed just how hard trading in the UK and Ireland has been, even with WYG’s significantly streamlined state. WYG has more than halved its workforce since the start of the recession to total about 1,600 at the end of March – cutting £110m from its cost base.

Heavy exceptional items drove it to pre-tax losses of £28.6m in the nine months to the end of March, on revenues significantly down at £121.5m. Even at operating level it barely broke even. At least a solvent and debt-free company should emerge at the other side.

Faced with the alternatives, that is an achievement indeed. But there must always be losers, and once again they are WYG’s long-suffering shareholders.

n Questions over the future of Yorkshire Bank have been raging for nigh on ten years now.

Will Australian parent company National Australia Bank sell it, along with sister bank Clydesdale, in order to focus on its much more lucrative operations down under?

Or will it boost its UK banks in order to get a proper foothold in the market over here?

Clydesdale and Yorkshire Banks account for just three per cent of the UK market and contributed less than five per cent of NAB’s group earnings in the year to September 2010.

If NAB decided to sell up now, it might have to take a loss and analysts are saying that before it gets out of the UK market it may need to get bigger first.

The 600 Lloyds branches up for sale are an obvious acquisition, as is the Government’s sale of nationalised bank Northern Rock. Analysts believe the Lloyds assets up for sale could be worth about £3bn while Northern Rock could fetch around £1bn.

If NAB bought the Lloyds branches it would obtain a tasty eight per cent chunk of the UK market. It could also be a more likely contender than new entrants such as NBNK and Virgin Money as it has a healthy £450bn balance sheet.

NAB’s Australian investors might prefer to quit the UK rather than expand in a low growth market, but in time NAB could float its UK arm. Such a scenario would be a win-win solution for NAB’s Australian investors, Yorkshire Bank’s 150-year history, Yorkshire’s employees and its customers.

n If you have a view on this, email [email protected]