DEALTALK-Dilute to taste; cash infusions get mixed reviews

Thu Dec 13, 2007 12:55pm EST

(For more Reuters columns on deals, click [DEALTALK])

By Mark McSherry

NEW YORK Dec 13 (Reuters) - Securities experts have a message for shareholders of pressured financial firms who worry that their interests may be diluted when their companies seek big capital injections: Get used to it.

As the global credit crisis deepens, other financial firms are expected to follow the examples of Citigroup (C.N), E*Trade (ETFC.O) and UBS (UBSN.VX) by securing big infusions of capital in exchange partly for a stake in the firm.

When companies issue new shares or convertible securities, a reduction in earnings per share can be the result. Increasing the number of shares outstanding can reduce the value of existing shareholders' investments.

"It's a big negative, but it's better than the alternative," said Sean Egan, managing director of independent credit-rating firm Egan-Jones Ratings Inc. "These times are more trying than normal."

The worldwide credit squeeze took a drastic turn on Wednesday, when the U.S. Federal Reserve and counterparts in Europe, Canada and Britain got together to provide funds to boost liquidity in their first coordinated action since terror attacks shut U.S. financial markets on September 11, 2001.

"In the case of all the (financial firms), market perception is critical," said Egan. "When problems arise, they need to address them fairly rapidly, and you worry about those companies which haven't been able to address their problems in a substantial way."

Massive mortgage-related problems and the credit market crisis are forcing more and more financial firms to urgently seek capital.

Last month, Citigroup sold up to 4.9 percent of itself for $7.5 billion to the Abu Dhabi Investment Authority, and E*Trade got a $2.55 billion infusion from investors led by Citadel Investment Group, which gained about 18 percent ownership of E*Trade.

On Dec. 10, The Government of Singapore Investment Corp (GIC) injected about $9.75 billion into UBS for a stake of up to 9 percent in the Swiss bank, and an unnamed Middle East investor agreed to buy a further stake in UBS of about 1.5 percent.

DESPERATE

One securities expert said some financial firms will prefer private injections of cash to public offerings, partly because public deals can entail disclosure of financial details that might spook investors.

"These are firms that are distressed and may have trouble meeting regulatory requirements," said professor John Coffee of Columbia University.

"And it would be extremely difficult to go public having a public offering because you were disclosing that you were short of the capital needed to meet your regulatory requirements."

Coffee said fourth-quarter results should be watched carefully for more write-downs and that more banks can be expected to seek capital injections.

"Even when it is dilutive, there might have been worse alternatives," said Coffee. "If you had to go for a public sale, that could have had an even more depressing effect on the market price."

Despite the threat of dilution to shareholders' interests, the big capital injections have on the whole been well received by the markets.

Another experts thinks he knows why.

David Easthope, senior analyst at financial consultancy Celent, said he views the capital injections fairly positively.

Easthope said that while long-term investors are usually very disappointed by dilution of their interests, another set of investors can get very excited.

"When you see the write-offs and you see the dilution you have a whole new set of investors to come in and say maybe the worst is over ... maybe now is the time to jump in," said Easthope.

"Some of those investors could be very excited ... it sends a nice signal that there are these white knights willing to provide capital." (Editing by Brian Moss)

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