The report is based on the financial study of the company named Autotrader. It is a US-based e-commerce company working globally. It was formed in 1997 as an online platform for car buyers and vendors. They introduce new, second-hand certified vehicles of distributors and private dealers. The website gives visitors automobile reviews, purchasing tips and comparative resources for car business and finance. The report is addressed to Dave Ellis and talks about the recent capital raise by the entity and discuss other methods available for the funding. It discusses the COVID-19 impact on the business in terms of short, medium- and long-term finances of the company and mitigating actions for the same.It also evaluates the proposal of no dividend to the investors for the period and analyses the dividend payment as per Modigliani and miller approach.
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Body
(a)
To improve the financial statement and liquidity status Autotrader announces on 1 April 2020 the placement of around 46 M Shares, increasing gross funds by £186 M (Autotrader, 2020). The increase in equity has allowed the business to manage in all of the members' economic interest. By the announcement, the news appeared that after allowing dealers to use its online platform for free during the coronavirus lockdown, Autotrader is going to issue around £200 million fresh shares to boost funds.
The FTSE 100 group has issued ads to car dealers during April and reversed compensation for March by 30 days as the car industry stalls, with forecourts, shut down and factories at a standstill. Dealers usually pay monthly site fees for uploading a fixed number of cars for the 53 million customers who, on the average, check vehicles around the UK on the Auto Trader website each month (Campbell, 2020). This payment holiday would make Autotrader lose some 80%, worth tens of millions of pounds, in April, of its monthly sales and may also stretch through May. In the 6 months to September, the firm switched over an equivalent of £31 m a month (Campbell, 2020). While expensive in the short-term, the decision prevents retailers from dragging cars from their site to save funds, indicating that a completely stocked site is available when car buyers are at home. The group has enjoyed an influx of vehicles added to its platform, with about 540,000 on March 31, 2020, contrasted with about 480,000 at the end of the 2019 year.
The company chose to finance its business by raising the funds through the equity that is one way to raise the business but there are several other ways in which the business finance could have been raised by Autotrader. Among the various methods of raising business finds it is broadly categorized into equity and debt funds or outside funds (Nikhila, 2020). The major other funding sources are compared and analysed below.
Financing through debenture issue: Some businesses raise finances by issuing convertible debenture or non-convertible debentures (Kalki, 2020). The convertible debentures in the market are very common. If the corporation is interested in increasing the necessary funding through bonds rather than selling shares, it issues debentures. This is beneficial as the issuer of debentures cannot demand possession and interest just needs to be paid. Debentures can either be provided for the company's early requirements or growth and expansions. The beneficiary of the debenture has no liability. Debenture offers funding for a given period of time and the organisation may change its business plan appropriately.
Lengthy-term loans: Banks and financial institutions such as I.D.B.I., I.C.I.C.I., and so on can be given long-term credits (Kalki, 2020). The financial firms' financing of term loans also offers an opportunity for investment funds to subscribe to the corporation's securities. This is because before approving credit, the commercial banks review the detailed project statement. It gives trust to investors and they, too, lend the business money in bonds, borrowings, fixed deposits, etc.
Until a few years ago, business banks mainly funded industries' working capital needs and resisted long-term loans against capital assets. For safety purposes, this policy was installed. However, small businesses were most affected by this programme. However, in the new state banks and other nationalised banks, small-scale enterprises under a liberalisation scheme are provided with funding support (Nikhila, 2020). The debts are issued under a liberalised scheme to these sectors. The loans for both fixed and working capital needs are issued to these businesses. State Bank of India has a special arrangement to help engineers, craftspeople and other skilled people who need funds to begin a business.
The major outcome of this analysis is that if the company wants to reverse this raising in future it has gone through the same old and lengthy process of buy-back whereas it could have used debt finances and paid interest for some time until it recovers its finances (Kalki, 2020). It would have flexibility in the capital structure in that case. Hence, it can be understood that there are several ways to raise finances and every source have its pros and cons. Selection of equity provided Autotrader with no burden of interest cost but have compromised on the flexibility of the capital structure.
(b)
The aims of Autotrader has been since the start of the global disease outbreak been to protect its people; aid their clients; ensuring that they can emerge fast from lockouts; and make further progress towards long-term strategic objectives (Autotrader, 2020). To the benefit of the population, it has managed to work with high expectations on all facets of the industry and is well equipped to succeed from the other side of the epidemic. This section explains the steps Autotrader has taken during this time of uncertainty to assist market. It also outlines the steps taken to ensure that the liquidity remains the organisation's long-term viability.
COVID and Costs monitoring:
The business took the prudent decision to minimise costs over time when retailer clients were closed down and core services free. The highest cost is for the people. Some groups lowered their activity level during the lock-down period and the business has staff using the CJRS (Coronavirus Job Retention System) and has employed just over 25% of the staff (Autotrader, 2020). It increased the amount of government funding for those placed on the field so that the overwhelming majority stayed completely compensated. By the end of May 2020, the people came back to work and ended dependence on this support from the government, as they had some trust of their capacity to retake charges and move from a loss situation to a profit (Ozili & Arun, 2020). At a time when the organization was facing serious concerns, government funding was gained. The Organization plans to refund the sums reported by the CJRS as the situation exists. As a result of this situation, Autotrader made no job cuts.
During this time, its executive directors waived 50 per cent of the compensation and agreed to waive annual bonuses for the year fiscal year ended March 31 2020. The majority of the Board have, during this crisis, agreed to waive its fees by 50% or more (Autotrader, 2020). In July 2020, wages and fees will go back to regular levels, with a return to higher sales. During this time, the discretionary spending, mainly for the promotion of their own name and goods, was reduced considerably.
COVID and Financial sources protection:
With a solid financial position, Autotrader joined the global pandemic. Net bank debt (identified as a Net debt before debt amortisation that excludes accrual interest and leases agreements) at 31 March 2020 was £275.4 million (Autotrader, 2020). The Company had £37.6 million in cash equivalents and cash and £313.0 million in gross debt under the group's RCF. The cumulative RCF obligations are £400 million and are accessible until June 2023 at least. The RCF has agreements on the obligation coverage and cost coverage checked periodically a year and reviews the 12-month duration:
EBITDA by net bank debt shall not be greater than 3.5:1. This ratio was 1:1 on 31 March 2020.
The EBITDA to interest payable proportion should not be lower than 3:1. This ratio was 41:1 on 31 March 2020.
COVID and Equity funds:
The company received a net of £183.2 m net of equity placement on 1 April 2020. In 2016, it started the share buyback programme, and that amount was 84.8 million shares compared with 46.5 million issued (Autotrader, 2020). The capital expenditure allowed the organization to tackle the crisis in the investors, clients and people's long-term interests and supports insurers against such a prolonged lockout, or a sequence of lockdowns, because of tremendous uncertainties. The raise also implies that the business removes restrictions that would otherwise be enforced in the medium term to maximize the benefit of market capabilities while also fulfilling debt obligations. It should also permit it a primary return to the old return on capital when, as a result of the COVID-19 crisis, many other companies can work at higher levels of debt (Autotrader, 2020).
Additional cash management steps in Covid-19:
Autotrader has taken a range of steps to save cash, such as:
Suspension of the stock buy-back scheme (year ended March 31, 2020: £62.0 million including expenses)
Delay in VAT disbursements (18.4 million pounds as of June 2020)
No final dividend for the 2020 fiscal year (31 March 2020: £42.6 million for the year ended)
Covid-19 Effect of on financial year ended on 31 March 2020:
Social distancing steps for COVID-19 entered into force on 17 March 2020. This harmed some of the organisation's revenue segments. After these strategies are implemented, the earnings of the home traders and service businesses were substantially decreased and the display initiatives by manufacturers and agencies were also lowered (Ozili & Arun, 2020). The influence on retailer sales was minimal in March 2020, even though the company effectively reinstalled its stock offering, some half stock prices have been transformed into free slots. The costs have remained substantially uninfluenced, yet the company has taken a more careful approach to recuperation, increasing the bad liability of the debts (Autotrader, 2020). Marketing investment in March has also been limited. The net effect is estimated to be about 3 million pounds lowering income for the March.
(c)
According to the Theory or MM Concept by Miller and Modigliani, the prices of the Company's stock have no relationship between dividend policies and assume the company's share value is improving by its investment policies (Megha, 2015). As long as their returns are greater than the equities capitalization rate "Ke," investors will be happy with the company's retained profits. What is the capitalization rate for equities? The percentage at which the company converts its income, dividend pay-outs or cash flows into equity or value. If the yields are less than "Ke" (cost of equity) the investors would like a dividend to collect the profits.
Miller and Modigliani's approach is based on certain assumptions that should be understood. They are:
The stock market is fine, i.e. shareholders are rational and connect free of charge to all the details. There are no floating or trading costs, no buyer is sufficient to control the price of the market and the shares are infinitely divided(Priya, 2016).
Taxes don't exist. Different taxes are applicable on both capital gains and dividends.
A business is expected to adopt a persistent strategy of investment. This means that the role of corporate risk and the return on investments in new ventures are not adjusted.
There is no ambiguity about future earnings since there's nothing risk associated, all the investors are sure about financial growth, dividends and earnings.
Miller's and Modigliani's Criticism:
It is anticipated that there is a perfect financial market without taxes, without flotation, and that there are transaction fees, but in real life they are unsustainable.
When stakeholders sell their shares, processing expenses are incurred. The investors are thought to sell their shares to make cash if dividends are not paid. But there is cost associated with stock transactions, i.e. investors need to sell more shares in the interests of current profits(Megha, 2015).
When the money is collected from the market, float expenses are incurred and thus cannot be overlooked because the underwriting board, couriers and other expenses must be paid off.
Dividend taxes and capital gains are levied. However, in contrast to tax due on capital gains, tax on the distribution of dividend is high. A later tax, levied only when the securities are issued, is the capital gain tax.
There is no question about the expectation of future earnings. There is considerable uncertainty in the future and the market situation influence the dividend strategy.
The MM method, therefore, implies that investors are oblivious to the growth in the value of the property and the capital gain(MM Approach, 2020).
For reasons Miller & Modigliani showed that the dividends have no importance in deciding the stock value, in the form of a matrix that is clearly seen as follows:
P0 = [1/(1+ Ke)] * (D1 +P1)
Here,
P0 = share market price at the start of the year
Ke = Equity cost
D1= Dividends paid at year-end
P1= share market value at the year-end
Dividend decision in Autotrader:
Despite existing uncertainties concerning the epidemic of COVID-19 (2019: 4.6 pence per equity), no final dividend was suggested. Thus, for the entire year, the dividend amounting to the interim dividend paid in January 2020 is 2.4 pence for each share (2019: 6.7 pence for each share). The organisation hopes that the prior capital return programme will be restored early. The measure of not declaring the final dividend is taken to preserve the cash reserves of the business in the crucial time of coronavirus (Autotrader, 2020).
The managers do not propose a final annual dividend. The total annual dividend thus amounts to 2.4p (2019: 6.7p), a transitional dividend payout in January 2020. The organisation has continued to invest in the firm to grow while at the same time returning about one-third of its investors' net income in dividend terms and is therefore unaffected (Autotrader, 2020). Any cash excess through these operations is used for the continuation of the stock buyback programme and to reduce the debt over the period. The company has restored to charge the customers but will continue to follow the current COVID-19 culture. With this surveillance under review, it hopes that the announcement of an interim dividend in November will give an early return to the capital allocation strategy.
The current price of the Autotrader shares is 576.60 GBP which is an increased value of 151.20 from the past 6 months and 41.20 from a year (AutoTrader, 2020). It depicts that the no final dividend policy has no adverse effect on the share price of the company.
Conclusion
The report has presented the understanding of the process through which the finance of about $200 M is raised by the Autotrader. It has also argued and presented a comparison of the various other methods of raising finance available to the Autotrader. The study has examined the impact of COVID-19 on the business in the context of its financial crisis and has presented the analysed mitigation adopted by the company. The no final dividend decision of the business has been revalued with the context of MM approach. A brief study of the approach has also been presented to understand that the no final dividend declaration will be beneficial for the company's cash reserves and should not adversely impact the interest of its shareholders. Therefore, the report has covered all the aspects of the issues raised by the management.
References
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Autotrader, 2020. Annual report. [Online] Available at: https://cdn-autotraderplc.azureedge.net/media/2013/auto-trader-annual-report-2020.pdf [Accessed 16 October 2020].
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AutoTrader, 2020. Share price. [Online] Available at: https://plc.autotrader.co.uk/investors/share-price-information/share-price/ [Accessed 16 October 2020].
Campbell, P., 2020. Auto Trader to raise £200m in share sale after waiving ad fees. [Online] Available at: https://www.ft.com/content/2a80e047-5502-46b5-98c7-a0f010e7a865 [Accessed 15 October 2020].
Kalki, 2020. Methods of Raising Finance. [Online] Available at: https://taxguru.in/finance/methods-raising-finance.html [Accessed 15 October 2020].
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Nikhila, 2020. Raising of Finance for a Company: 12 Methods. [Online] Available at: https://www.businessmanagementideas.com/financial-management/raising-of-finance-for-a-company-12-methods/6912 [Accessed 15 October 2020].
Ozili, P. & Arun, T., 2020. Spillover of COVID-19: Impact on the Global Economy. [Online] Available at: https://mpra.ub.uni-muenchen.de/99850/1/MPRA_paper_99850.pdf [Accessed 16 October 2020].
Priya, P., 2016. Dividend policy and its impact on firm value: A review of theories and empirical evidence. Journal of Management Sciences and Technology, 3(3), pp. 59-69.
