Why Wall Street is backing Goodman Group’s $4bn-plus equity raising

Goodman Group is raising equity for data centre opportunities. Picture: iStock

Industrial real estate powerhouse Goodman Group has leaned on the might of Wall Street to stand behind its $4bn-plus cash call this week.

But JPMorgan, Morgan Stanley and RBC’s decision to fully underwrite $4bn for the raise comes with strings attached.

To provide a backstop for the $4bn, it’s likely that the banks insisted on a placement structure for the deal – less risky than the alternative, which would be an institutional entitlement offer.

Investors were told by way of a term sheet on Wednesday morning that Goodman would raise $4bn by way of a “pro rata” placement at $33.50 a share, a 6.9 per cent discount to the last closing price of the shares, which was $35.98.

After selling 119.4m shares this way, in deal that as at the close of trade on Wednesday was fully covered, retail investors could participate in a $400m share purchase plan.

A placement typically involves the sale of shares to a small number of private investors, but when it’s “pro rata”, it means that shares are placed to existing institutional investors based proportionately on what they already own.

Retail investors cannot participate in this part of the deal, with their opportunity to lift their interest through the share purchase plan only, which leaves them slightly out in the cold.

Goodman Group boss Greg Goodman in Sydney. Picture: Renee Nowytarger/The Australian

About a quarter of Goodman shareholders are retail investors, who could have participated in an entitlement, so then they would have been entitled to take up about $1bn of the stock on offer.

But what it does do is provide a fair allocation system for the institutional shareholders, who are prescribed shares proportionately.

Perhaps, though, Goodman did not have a choice but to structure the deal this way if it wanted the support of the banks to fund the deal at a slim discount in the event that shareholder demand was not there.

It’s likely the banks involved wanted the deal done this way, because it would be less risky for them, as the timing of a placement is faster than an entitlement offer, and the banks can get the money in more swiftly through the door before market conditions change.

It also means they are prepared to underwrite the deal at less of a discount.

Pro rata placements have not been something commonly seen in the Australian equity markets, but emerged during the global pandemic from 2020, with Westpac and toll road operator Transurban both raising money this way.

ASX 100 companies have also warmed to the structure, as they favour offering fair treatment to existing institutional investors.

DataRoom also understands that the condition of the deal was that Goodman could secure $1bn of debt which the big Wall Street banks chosen for the deal could provide.

RBC, JPMorgan and Morgan Stanley all have big balance sheets and while providing debt, also have the strength to stand behind an equity raising of such a large size.

But banks such as UBS, Goldman Sachs and Macquarie Capital may also have had conflicts of interest given a closer relationship to data centre operator Next DC.

As a result of this trade, RBC, JPMorgan and Morgan Stanley are unlikely to appear in the corner of Next DC for any future equity raising it carries out in the near term.

The deal is one of the largest ever equity raisings, well ahead of Next DC’s $1.3bn cash call in April and rivalling the $6bn-plus secured from investors by CSL in 2021 for its Vifor Pharma purchase.

And some in the market were surprised by the size, what with Goodman positioning itself as the ‘capital light’ way to gain exposure to the popular data centre industry that constantly requires cash for asset upgrades.

Goodman has flagged equity partnerships for its data centre development.

But now it has $4bn in the door upfront to help pay for its program to develop $10bn on data centres by June next year – 46 per cent of its industrial property projects.

Investors may be hesitant to commit much future capital to other Australian listed groups exposed to data centres after spending up big on the Goodman raise.

The fallout is already evident, as Next DC shares were down 2 per cent on Wednesday and shares in data centre owner DigiCo REIT were down 3.5 per cent in morning trade.

It will be interesting to see if China Investment Corporation participates in the raise after divesting a 2.6 per cent interest worth $1.9bn in December at $37.55, reducing its holding from 8.9 per cent.

That trade then was reprised to $36.85, a 3.3 per cent discount to the last closing price, after there was about $1bn worth of stock left unsold.

Goodman’s share price has been on the rise in the past year, as investors seek exposure to data centres.

They remain in strong demand because of the need for artificial intelligence and cloud storage, as evidenced by the $24bn outlaid by Blackstone and its backers last year for data centre giant AirTrunk.

The raise coincided with the release of Goodman’s half year result on Wednesday, when the company told the market it reported a $799.8m net profit, up 463.4 per cent on the previous corresponding period, as revenue gained 25.2 per cent to $1.3bn.

Goodman’s $84.4bn real estate portfolio includes data centres in Australia and New Zealand, Hong Kong and Japan, North America, Europe and the UK.