While the coronavirus crisis has caused numerous companies to go cap in hand to investors for cash to keep themselves afloat, other firms are seeing the crisis as an opportunity to raise cash to make strategic moves and consolidate their market position before the volatility subsides.
On Friday, online clothing firm Boohoo Group PLC (LON:BOO) unexpectedly unveiled plans to raise £200mln in a share placing amid what it said were “numerous opportunities” that are “likely to emerge in the global fashion industry over the coming months”.
The funds will almost double the firms existing firepower, having already had £240mln in cash, with analysts at Peel Hunt saying in a note that the scale of the fundraise indicated that the firm had “the ambition for considerably larger transactions”.
Boohoo’s ambitious plan might not be limited to failing businesses, with analysts at Liberum saying the cash provided “significant clout” and they saw “potential for many deals” and suspected that “some large brands could be acquired”.
Peel Hunt agreed, saying that Boohoo “will be looking at globally relevant fashion names (which may mean international acquisitions too), not just failed businesses”.
Keywords levels up cash balance
A similar strategy was unveiled by video game services firm Keywords Studios PLC (LON:KWS) after the close on Thursday, with the group raising £100mln to leverage what it said was a “unique opportunity” to continue its acquisition strategy.
Keywords said while the coronavirus pandemic had increased the amount of video game playing, driving continued demand for content and for its own services, it was expecting to see “some stress in predominantly smaller service providers, which are typically single location and service with fewer clients and less able to weather the disruption”.
The company added there was an opportunity for its to “ leverage its position as the market leader to continue its acquisition strategy of high-quality businesses, increasing scale and capability and further accelerating growth” and that the funds raised will enable it to maintain a strong balance sheet “without constraining its acquisition strategy when prospects for attractive M&A opportunities have rarely been higher”.
There are already signs of this kind of consolidation occurring in the video game services sector, with Liberum’s analysts highlighting an acquisition on Friday made by Keywords peer Sumo Group PLC (LON:SUMO) for work-for-hire development firm Lab42.
“Perfect time” for acquisitions, says analyst
The actions of both Keywords and Boohoo seemed to be endorsed by AJ Bell’s investment director Russ Mould, who said “now is a perfect time for the strongest companies to buy weaker players, thereby extending their reach and market position”.
Singling out Boohoo, Mould said the amount of cash raised “would suggest that Boohoo is confident that opportunities will emerge as more retailers struggle to stay alive. A near-£200mln fundraise will now enable Boohoo to act fast should there be a chance to buy something out of administration”.
However, he warned that other issues for the firm could persist that more acquisitions may not resolve.
“There are always risks with buying other companies and there are longer term questions about whether there will be a consumer backlash against its fast fashion model. After all, the idea of constantly turning around new designs and customers wearing them once and chucking the clothes afterwards doesn’t resonate well with the ethical values increasingly being embraced by the younger generation”, Mould said.
Shares in Boohoo rose 0.7% to 353.8p in lunchtime trading on Friday, while Keywords was 4.2% lower at 1,475p.