Zurich, June 11 - Swiss flavours and fragrances maker Givaudan AG will issue new shares at a hefty discount to reduce debt from a $2.25 billion acquisition as it struggles to improve sales hit by the economic downturn.
Shareholders will be entitled to two new shares for every 15 existing shares they hold, at a price of 420 Swiss francs each, a discount of around 40 percent to Givaudan's closing share price of 698 francs on Wednesday.
"A rights issue has been rumoured for some time given the company's indebtedness but the 40 percent discount appears steep," Kepler Capital Markets analyst Jon Cox said.
A spokesman for the company said the pricing was in line with other recent rights issues, and that the underwriting banks had advised the company that this was an opportune moment for a rights issue following the recent market rally.
The issue will help Givaudan to pay off a loan for its $2.25 billion buy of Quest International in 2007 and would reduce the absolute level of debt to be refinanced in 2011 and 2012.
It is the second new share issue in two months after the company issued warrants to shareholders as part payment of the annual dividend in April.
Shares were 3.1 percent lower at 676.50 Swiss francs by 0930 GMT, versus a slightly higher European chemicals sector.
The Geneva-based company will raise around 420 million Swiss francs ($391 million) by issuing 1 million shares to reduce debt and increase flexibility as it reaffirmed targets. The issue is fully underwritten by Nomura and UBS, and supported by major shareholders, the company said.
"The announcement is hardly going to be palatable to investors," private bank Wegelin said in a note. "A share price hit and a following entrenchment of the stock under the 700 Swiss franc mark appears to be a likely scenario."
Givaudan also said consolidated operating income for the first quarter was 110 million Swiss francs -- it does not usually report quarterly income -- and that weak trends in financial performance seen in the first three months of 2009 have continued into the second quarter.
The company, which makes ingredients for soaps, confectionery, soft drinks and designer perfumes, said in April that demand for products such as fragrances had been hit by low consumer confidence and reduced travel activity.
Vontobel analyst Claudia Lenz welcomed the deleveraging of the balance sheet and lower refinancing needs in 2011 and 2012, while ZKB said the rights issue was a "liberation."
Givaudan, which normally reports on its financial performance twice a year and provides quarterly updates on its sales, missed forecasts with a 7.3 percent fall in first-quarter sales as customers ran down stocks.
"It's difficult to make a comparison with the profit update," Wegelin said. "However, that and the outlook for the second quarter does not look exactly inspiring."
The company reaffirmed its targets of sales of 620 million Swiss francs by 2013, a pre-acquisition EBITDA margin of 22.7 percent by the end of 2010, and capital expenditures of 3 to 4 percent of sales in 2009 and approximately 4 percent between 2010 and 2012.