CIC Deal A Band Aid Only For Goodman Group

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For some time Goodman Group (GMG) has been struggling with the need to deal with around $520 million debt due to be refinanced in May of 2010 and as a follow on measure to the granting of options to Macquarie Group ((MQG)) the company has now reached a deal with China Investment Corporation (CIC).

The deal is essentially a $200 million loan for nine months with the provision to extend for a further 15 months in return for CIC receiving around 255 million options at a strike price of $0.30. In the view of analysts at Citi, the deal gives the group some time to work out how exactly it will deal with the upcoming refinancing but it doesn’t exactly solve the issue.

As the broker notes, while the loan gives CIC a good inside look at Goodman Group from which it can make a decision to invest further if it wants, even if all the options being granted to CIC and Macquarie are exercised, the company will only raise round $226 million. This means Goodman Group will still have to find almost $300 million to complete its refinancing.

This leads the broker to suggest the company is preparing for some sort of equity issue, with a large enough issue to raise more than $900 million at around $0.35 and so allowing the company to payout outstanding debt through to FY11 seen as the most likely outcome.

While such an issue would be further dilutive for shareholders, it would allow the company to deal with its debt obligations. Citi suggests such an outsome appears inevitable, but ongoing uncerainty as to exactly what course of action management will take sees it retain its Hold rating on the stock.

JP Morgan has a similar Neutral rating on the stock, but the broker at least suggests CIC is a good strategic partner for the company, especially as the finance move gives additional time for Goodman to create a longer lasting solution for its structural issues before the debt refinancing is completed next year.

While the company cannot control its share price in the meantime, JP Morgan sees scope for CIC to look to take out minority shareholders if the share price was to fall too far in the interim, meaning the latest deal offers unitholders some downside protection.

Upside remains possible as JP Morgan values the stock at around $0.76, but for this to be attained it notes the debt issue must be addressed and so a dilutive equity issue remains the most likely alternative in its view. This supports its cautious approach to the stock.

More negative is Bank of America-Merrill Lynch as on its numbers the group could require as much as $1.5 billion in equity to fully recapitalise, an amount far higher than the $900 million suggested by Citi. Given this would be even more dilutive to existing shareholders than the 24% potential dilution put forward by Citi, BA-ML suggests outperformance for the securities is very unlikely, hence its Underperform rating.

Overall the FNArena database shows the stock is rated as Buy once, Hold six times and Sell once, with an average price target of $0.447. This compares to a trading range over the past year of $0.135 to $3.76 and a share price as at 11.10am this morning of $0.375, down 4c or almost 10%.