Esprit shares plunge to two-month low after rights plan

HONG KONG - Shares of Esprit Holdings Ltd (0330.HK) fell nearly 17 percent on Wednesday to their lowest in two months after the Europe-focused fashion retailer unexpectedly announced an up to $677 million rights issue, raising doubts on the beleaguered company's operational and financial outlook.

Esprit, which competes with the likes of U.S. group GAP Inc (GPS.N) and Japan's Fast Retailing Co Ltd (9983.T), proposed a one-for-two rights issue of new shares to existing shareholders to raise up to HK$5.25 billion ($677.41 million) to help rebuild its brand, which the company last year said had "lost its soul.

The new stock will be priced at HK$8 per share, a discount of about 36 percent to Monday's close.

Hong Kong markets were shut on Tuesday for a public holiday and Esprit shares fell to as low as HK$10.36, the lowest since August 7, after resuming trading on Wednesday. The stock stood at HK$10.9 at midday, down 12.4 percent, and lagging a 0.3 percent gain in the benchmark index .HSI.

"Investors were quite pessimistic about the company as it aims to tap shareholders when no significant improvement was being noted in business performance," said Steven Leung, a sales director at UOB Kay Hian, adding investors had doubts about the success of Esprit's multi-billion plan to revitalize its brand.

Other analysts flagged concerns about the overall business operations of Esprit, which has a market value of around $2.1 billion, down from roughly $8 billion at the end of 2010.

"The scale and timing of this fundraising will likely come as a disappointment to investors and will also raise concerns regarding the underlying operations," Peter Tang, analyst at Mizuho Securities Asia wrote in a research note.

Tang, who maintained an "Underperform" rating on Esprit, said the rights issue, if completed, would give the company "the cushion of an improved balance sheet".

"A rights issue is a surprise to us," Annie Ling, analyst at Deutsche Bank, wrote in a research note. "Esprit explained that it opted for a rights issue due to a decline in bank borrowing, prompting investors to suspect its bank funding costs have increased or working capital has deteriorated."

NEW CEO

Esprit, which earlier this year hired a new chief executive from rival Zara's owner Inditex SA (ITX.MC), said last year it would invest more than HK$18 billion in the restructuring.

Goldman Sachs wrote in a research note that the rights issue suggested a lack of operational improvement into the second-half of the year 2012 and the likelihood that a significant investment would still be needed to improve operations.

Some analysts said the company may now be seen as a bargain.

"With its huge net cash on hand (of about HK$6.5 billion) after the rights issue, it is seen to be a bargain among brands with an international presence," said Steve Chow, analyst from Sunwah Kingsway Research.

Shares of Esprit are up 8.8 percent so far in 2012, underperforming an 18 percent rise in the benchmark index.

($1 = 7.7500 Hong Kong dollars)

Reporting by Donny Kwok