The McColl’s share price dropped by 16% after its plan for capital raising

The McColl’s (LSE: MCLS) share price has seen some volatility in the last week following the company’s plans for a £30m cash call to expand its partnership with WM Morrison Supermarkets (LSE: MRW).

The stock was trading at a near high of £34.89 by the end of the day on 6 August but dropped by 16% to £29.15 at the start of trading on 9 August. It’s now down 14% year-on-year. 

McColl’s plan for capital funding

McColl’s, which operates 1,200 local convenience stores and newsagents across the UK, started out as a cigarette vending machine maker in 1973. It listed in 2014. Back in March, it stated it had come to an agreement to extend its partnership with Morrisons by three years. This meant its partnership would now last until 2027. CEO Jonathan Miller stated in March that: “The agreement represents a significant milestone in McColl’s strategic goal of becoming a food-led convenience retailer.“

Its recent plan for a £30m cash call will require additional equity financing. The recent drop in the McColl’s share price has followed this news. That’s perhaps due to worries over share dilution in the near future.

The cash call will require a shareholder vote of approval due to McColl’s £40m market capitalisation. However, there has been no final decision over whether the capital raise will go ahead.

Assuming it does go ahead, it’s believed that CEO Miller will be providing an amount adding up to seven figures to help subsidise the capital funding.

The company has said that the funding will also be used to make its balance sheet healthier. It had reported a total of £89.4m in net debt in its FY20 report.

Growth for local convivence retail

As part of its Morrisons deal, McColl’s will be converting a large number of its stores into Morrison Daily stores. The company said its existing Morrisons stores are its top-performers.  

Angus Porter, the McColl’s chairman, has expressed his enthusiasm about the growth of local convenience stores. “Demand for our local convenience retail offering has never been higher, highlighted by like-for-like revenue growth of 12% during the year,” he said. And he emphasised the importance of local convenience stores due to the restrictions during the pandemic.

Bidding war for Morrisons

McColl’s has told investors that the intensive bidding war currently going on for Morrisons will not affect its partnership with the supermarkets giant. 

Private equity firm Clayton, Dubilier & Rice (CD&R), and Fortress Investment Group have both raised (or are reportedly planning to raise) their bids for a takeover of Morrisons. The current offer from Fortress stands at £6.7bn and while the board is supporting that bid, Morrisons has delayed the date for a shareholder vote so it’s not yet a done deal. 

Financially, Morrisons showed a good sales performance in its FY21 Q1 report. Total sales were up 5.3% with online sales up by 113%.