Investec Director of Corporate Broking David Flin and Head of Retail Research Kate Calvert analysed the key data points that show the beneficiaries of the pandemic’s sector trends are not only using capital raising to bolster balance sheets but also to position for growth.
Behind the numbers
According to data from Dealogic, UK listed companies in the retail, leisure and transport sectors raised £9.1 billion from investors from March 2020 to March 2021. This was a significant increase from the overall figure in 2019, which totalled £1.13 billion.
“This amount of capital raising is unprecedented in these sectors, which are normally defined by their cash-generative nature. The extraordinary figures are a measure of extraordinary times,” Flin said.
“When the pandemic first hit, there was a dash to shore up balance sheets to protect against the unknown. But companies are now returning for fresh capital with different considerations. Now, additional funds will support investments and acquisitions – as well as further restoring balance sheets.”
Flin explained that this blended approach protects against further downside risk and enables companies to capitalise on emerging opportunities in the post-pandemic world.
“The pandemic created a one-off dislocation, offering investors a 12-18 month runway of new investment opportunities in re-engineered business models that are deepening footprints in a narrowing field of competition,” he said.
To help realise their future growth strategies, Investec has supported a spectrum of businesses in these sectors with significant capital raising in the first quarter in 2021, including JD Sports, which raised £464 million to fund expansion and potential acquisitions.
Flin explained JD Sports undertook a capital raising to deepen its competitive advantage and extend its global reach. The proceeds were also used to reset its balance sheet after a raft of successful acquisitions in the US.
“The pandemic created a one-off dislocation, offering investors a 12-18 month runway of new investment opportunities in re-engineered business models that are deepening footprints in a narrowing field of competition."
JD Wetherspoon, meanwhile, has begun to capture new flagship sites in heavy footfall areas, where previously rents would have been prohibitive,” said Flin. It undertook a capital raising of £94 million to deploy for future opportunities.
Hollywood Bowl and The Restaurant Group are also expanding after bolstering their financial positions. Hollywood Bowl is deploying £30 million in capital raising to accelerate investment in new and existing centres. The Restaurant Group raised £175 million, allowing the business to capitalise on falling rents and discounted premium sites to expand the locations of its strong performers such as Wagamama and its pub business Brunning & Price.
Calvert said these examples illustrate how corporates and investors are preparing for the return of demand for leisure activities that have been off-limits during lockdowns.
Return of consumer confidence
Calvert also remarked that investors are getting more confident about the prospects of retailers as the economy recovers. Consumers are sitting on extra savings due to the crisis and she thinks they are likely to splash out on newly opened leisure activities.
“Sentiment is changing due to gradual unlocking, vaccinations and household savings. In 2020, the household savings ratio rose sharply, reaching a record high of 16.3%, compared to 6.8% in 2019,” she said.
According to Bank of England Chief Economist Andy Haldane, across the various UK lockdowns, consumers accumulated a stock of savings of more than £150 billion.
“While the pandemic accelerated inevitable structural trends and signalled the demise of a number of household name retailers, there will be some reversion toward the mean.”
IPO market hots up
In recent months, among the listings, this year are well-known brands such as Moonpig, Dr. Martens and the Hut Group. But is this a sign that conditions are ripening for a rush of investor back into retailers?
Flin explained that online-only retailers have clearly benefitted from the shift from physical to online retail during the pandemic and much of this change in consumer behaviour is expected to remain.
“This has allowed online businesses to capture multiple years’ worth of growth over the past 12 months and scale at a much faster rate, creating businesses that are attractive to public market investors,” he said.
However, looking ahead, Calvert said successful Initial Public Offerings (IPOs) will be those businesses that have adapted to the changing landscape and can leverage the opportunities that the pandemic presented.
“While the pandemic accelerated inevitable structural trends and signalled the demise of a number of household name retailers, there will be some reversion toward the mean,” she said.
“The pandemic has fundamentally changed consumer behaviour. Those companies whose business models can harness a more virtual world are clearly beneficiaries of a new retail order, but footfall will return and there are many examples of successful physical players. Only time will tell us how big and sustained the shift to online will be,” she added.
How will this capital be used in the future?
Undoubtedly, it has been a disruptive period for the leisure and retail sectors. But will this trend of mass capital raisings continue? Calvert believes companies will look to deploy the raised capital: “going forward, capital raisings are likely to be used for mergers & acquisitions (M&A). Companies will look to take advantage of market dislocations to strengthen competitive positions. So, rather than fixing balance sheets which we have seen recently, I can see in the near future that companies will look to achieve their growth aspirations.”