My Finance Diary 2021 - Page 1

 

Necessary Financing – Post-Covid building bloom steers Antin towards IPO

 

A page from my undergraduate learning Diary……………..

Recently, when I was going through FT.com, I found a news article which is regarding the French private equity firm, Antin’s decision to go for IPO. Antin is one of Europe's largest infrastructure investment funds. Since, not only I am interested in Capital structure & cost of capital lesson, but also Post Covid financing decision is a HOT Topic nowadays, I thought, the knowledge I gained from this subject area would assist me to dive deep into this news.     

 So, let’s start…………

Out of the decisions that every business make, the financing decision is the MAIN. Funds can be sourced either internally or externally or using both. Capital structure is a combination of equity and debt that a firm utilizes to finance its business.

Infrastructure fund giant, Antin’s capital structure is comprised €51.706million of debt and €67.386million of equity capital. Capital structure can be measured using gearing ratios such as Debt-Equity ratio, Debt-Asset ratio, Debt-Capital employed ratio. If so, what is Antin’s gearing ratio? It’s 76.7% (Debt ÷ Equity). As I learnt, Management should determine their capital structure and has to be set in a way that maximizes the firm's value. 

Having learned that, I could able to identify Antin’s capital structure and it can be demonstrated as follows. Anyways, there’s further room for the debt capital since the generally optimum Debt-Equity ratio is 100%.

Rauscher, co-founder of Antin declared that they are going to list in Euronext Paris in September. Firstly, they are planning to raise €350 million of equity capital through their IPO. Why do they need equity capital?  To substantially expand their business by moving into new sectors and reinforce their brand. Even though equity is a permanent source of finance and there is no obligation to pay dividends, the cost of the equity capital is high compared to Debt. After the IPO, Antin’s equity capital will be increased hugely resulting in an inefficient capital structure. Due to the high COC Antin should have sufficient liquidity to pay dividends to its shareholders. Unless their shareholders will sell their shares and invest in another company that pay higher dividends. As I feel, since, there is further room for debt financing and Mostly, European countries are implementing near-zero interest rates, sourcing further debts are the most suitable. Hence, Antin can be benefited from the low cost of capital even though it has to repay. Moreover, debts can be easily gathered from the banks/lenders since Antin is a giant in the industry and going to invest these funds in booming sectors and most profitable projects.  

Hence, I realized that this French company’s value can be maximized if the management decides to fund their new project not only 100% from cash generated from IPO but also the debt financing maintaining optimum capital structure. To do that, they have to first reduce the number of shares they are expecting to issue at IPO. Then they can obtain debts from banks/lenders to fund the remaining estimated investment value of the new project (Fund V).

Having learned modified Modigliani & Miller theory, I think that, If Antin raises further debt to fund their new project, it occurs as a tax shield and the firm's value goes up. As high gearing reduce the WACC. Remember, WACC always should be lower than IRR.

Furthermore, I have learned that, as a result of the tax shield, net profit would increase. In the context of Antin, currently, the PE ratio is higher compared to the industry which indicates growth possibility is much higher. However, if they take debt further, net profit will go up and as a result, earning per share increases and eventually, could able to get lower PE ratio. This will attract more investors since they may think share stock is undervalued.

Look here... This is Antin’s current PE Ratio.

 

Nevertheless, having discussed Tradeoff theory, I know Antin can increase gearing only up to a certain point, beyond that point shareholder wealth won’t be maximized, increasing gearing beyond it becomes risky as financial distress rises. Maintaining an optimum capital structure is encouraged here.

Finally, Antin’s decision on IPO is fine, nevertheless, maintaining capital structure is required.

Before winding up, I understood that financing decisions are crucial for any company.

Stay tuned until I come up with another page in my DIARY…….!

 

 Gross, A., & Alabi, L. (2021). France’s Antin plans IPO to ride infrastructure boom. FT.Com. Retrieved from https://www.ft.com/content/3b754608-c71c-4473-8d67-0ce141d32dd1