City Lodge faces resistance to its R1.2bn rights issue. Here’s why

In the midst of the COVID-19 pandemic, many listed companies have turned to rights issues to raise much-needed capital. However, according to Oasis Asset Management, not all equity issuances are created equal. Adam Ebrahim, the CEO of Oasis Asset Management, joined CNBC Africa to shed light on the nuances of these capital-raising efforts and the potential impact on shareholders. Ebrahim highlighted City Lodge's upcoming R1.2 billion rights issue as a case study in this ongoing debate. Ebrahim expressed concerns over City Lodge's proposed rights issue, emphasizing that while the company has a strong asset base and a reputable history, the scale of the issuance could lead to significant shareholder dilution. He noted that the proposed 200-fold increase in issued share capital could potentially dilute investors' holdings by 99%, a move that could erode shareholder value and loyalty. Arguing for a more balanced approach, Ebrahim suggested alternatives such as a smaller rights issue combined with a sale and leaseback arrangement to address City Lodge's short-term liquidity challenges without excessively diluting existing shareholders. He urged shareholders to vote against the current resolutions and called for a collaborative dialogue between the company's management and investors to find a more sustainable solution. Ebrahim's critique extended beyond City Lodge to the broader landscape of rights issues in the current economic turmoil. He cautioned against a blanket approach to capital-raising, highlighting the importance of preserving shareholder value and aligning corporate actions with long-term sustainability. The response from City Lodge's management to Oasis' proposal remains uncertain, but Ebrahim's stance underscores the complex dynamics at play in the realm of equity issuances during the COVID-19 crisis. As companies navigate unprecedented challenges, striking a balance between immediate fundraising needs and long-term value creation emerges as a critical task for corporate leaders and investors alike. The City Lodge saga serves as a microcosm of the broader debate surrounding rights issues and shareholder interests in the era of COVID-19. As the company grapples with its financial strategy, the outcome of this tussle will not only impact City Lodge but also offer insights into the evolving landscape of corporate governance and investor relations in a post-pandemic world.