Following on from its trading halt for capital raising purposes that was announced last week, Yowie Group Ltd (ASX: YOW) this morning updated the market on the success of the raising. The raising, initially reported to be $25 million by Fairfax media, was significantly oversubscribed and ended up raising $32 million by issuing 35 million shares at $0.90 apiece.
The placement, which was previously approved at the company's Annual General Meeting in November, will increase Yowie's total shares on issue by approximately 20% to 206 million shares. Shares were issued to new and existing institutional and sophisticated shareholders.
A black mark against Yowie
Yowie earns a demerit point for offering discounted shares to parties who aren't currently shareholders. It's something that contributors and Foolish analysts alike have written about for many years – if these prospective investors are so interested in a company, why did they have to be offered a discount to incentivise them to invest?
This situation is worsened when ordinary shareholders are excluded from the opportunity to participate equally in the capital raising.
But just as important…
Investors will be wondering what the capital is to be used for. Yowie's statement that the money would be used for "working capital and, in particular, for the continued rollout of the Yowie product in the US" is a little empty given that the company already had $11.7 million in cash as of 31 Mach 2016, and was breaking even on an operating level.
Yowie's chocolate wrapping capacity is currently 20 million units, and the Madeleine factory has a base case maximum production level of 100 million units. In order to ramp up production, Yowie must purchase additional wrapping machines and ingredients. This will be expensive and may even have stretched the company's original $11 million bank balance, if Yowie elected to go straight for 100 million units.
However, it's very unlikely that the expansion will cost anywhere near the $32 million that Yowie raised, which leaves two possibilities. Potentially, management raised as much as they could in order to ensure they would never have to raise again, and don't have plans for spending it all.
Alternatively, management could have other plans for the cash – such as on media, movies, and merchandise, bearing in mind the recent appointment of 'Global Creative Consultant' Bruce Davey. This would take the company into territory that is more difficult to value, and investors will have to watch that spending is likely to generate a return.
