Fairfax ups the ante

Fairfax has exceeded expectations, announcing a $684 million capital raising offer via a three-for-five non-renounceable rights offer at 75 cents per share, a 17.6 per cent discount to the closing price on February 25.

Yesterday, word on the street was that Fairfax would be raising $200 million, or $500 million at most. The size of the offer perhaps shows just how worried the media group's shareholders are about the company's debts.

Raising the capital shouldn't be a problem, however. Of the total offer, $438 million is underwritten by institutional underwriters UBS and ABN Amro and John B. Fairfax's private company Marinya Media will be tipping in $12 million. Marinya's participation will also mean that any dilutionary effects to the largest single shareholder will be minimal.

To ensure swift success, a large team of senior wheelers has been thrown at the deal. Nick Roe, Rico Overhaart, Oscar Ludwigson and Jason Valmadre have been keeping the phone lines busy at ABN Amro, while over at Chifley Square, UBS has assembled an even bigger contingent to call up the fund managers: Guy Fowler, Mark Burmeister, Amelia Hill, Simon Cox, Emma Christiansen, Tim Freeman, Nick Sims and Robert Mactier.

Shannon Finch and Jason Watts from Mallesons Stephen Jaques acted as legal advisors to the underwriters, while Freehills advised Fairfax.

Obviously Fairfax didn't beat around the bush, but one insider said that in the first instance it was Fairfax's institutional shareholders who thought a rights offer would be a good idea to shore-up capital and defend Fairfax against the short sellers and its rivals at Business Spectator. Fairfax initially maintained that it did not need to raise capital as its $75 million sale last week of the Southern Star television production and distribution business would be enough to keep a lid on covenants, along with strong free cashflows and a reduced dividend payment.

"Our decision to raise new capital at this time is in response to market feedback following our results presentation this week," said Fairfax chairman Ron Walker. "It has become clear to us that in these extremely unstable times our shareholders are supportive of improving our balance sheet position."

"The entitlement offer announced today places Fairfax Media in a much stronger financial position in the current climate of economic uncertainty and volatile market conditions and should alleviate continuing market concerns about capital structure," said chief executive Brian McCarthy. "Following a review of the options available to strengthen Fairfax Media's balance sheet, the board believes that this entitlement offer is an equitable alternative for all shareholders."

Proceeds of the entitlement offer will reduce Fairfax's net debt for covenant purposes from $2.5 billion to $2.1 billion on a pro forma basis at December 28, 2008.