Why Downer EDI Shares Dropped 25% Today

Downer EDI Ltd [ASX:DOW] is a $2.3 billion dollar company with eggs in many baskets. It maintains around 40,000kms of road in Australia. It also designs and constructs pre-feasibility studies for connectivity and technology companies.

This morning, DOW’s share price ripped down. The stock fell 25%, to $5.56 per share. The drop eliminated any returns shareholders gained in 2017.

The stock is now down 8.7% year-to-date.

What happened?

DOW announced the completion of their institutional entitlement offer. This simply means that it offered institutional investors the chance to buy more stock or other assets which cannot be transferred to another party.

The offer was a 2-for-5 renounceable offer, which raised around $757 million.

Reported by the Australian Financial Review:

While Downer’s deal was designed to compensate renouncing shareholders, it’s understood there was insufficient interest in a large parcel of rights offered to other investors over the past 24 hours for there to be any compensation. 

It’s a bad sign for Downer, which has spent three days marketing its $2 billion-plus acquisition of cleaning and catering contractor Spotless Group, and it’s also bad for the renouncing institutional shareholders.

What now?

It wasn’t the best move by DOW. Shareholders still holding the stock might be rightfully angry at the company’s move to diversify their operations further. While mainstream investors preach diversification, there is a point where it begins to hurt, rather than benefit, companies.

Businesses aren’t great at doing everything. Specialisation is what gives many of the best companies their edge.

Instead of inviting competition and increasing costs by diversifying, they should focus on their strengths to increase their competitive advantage.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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