Australian financial services firm City Pacific dropped its A$1.3 billion (US$1.1 billion) plan to buy the management business of rival MFS after financing worries saw MFS shares' plunge.
Trading in MFS shares was halted on Monday after the company said in a separate statement it was considering changing its chief executive and had received a number of proposals from parties seeking a majority stake in its Stella tourism business. It gave no further details.
The shares had dropped 70 percent on Friday, wiping out over A$1 billion in market value, as investors became concerned the firm was in financial distress after it unexpectedly announced a rights issue to raise A$550 million for Stella to boost its capital.
Macquarie Equities analyst Mark Carew told clients in a note the key uncertainty was why MFS wanted to raise so much when it only had A$150 million of short-term debt maturing.
"This has frightened investors as to bigger potential problems within the group. The market has taken this pessimistic view and is presuming MFS is in financial distress," he said.
The collapse of the deal is the latest example of nerves surrounding any company looking to raise money amid a global credit squeeze caused by the U.S. subprime crisis.
MFS' problems follow shopping mall owner Centro Properties Group's difficulties in extending a tight refinancing deadline, which have already forced its chief executive to depart.
Analysts on a conference call with MFS on Friday questioned the need for the capital raising, suggesting it implied a funding shortfall. But the company maintained it would have no trouble refinancing A$150 in short-term debt due in March.
"The rights issue was a major shock to everybody," Constellation Capital Management investment manager Richard Morris said on Monday. "With the Centro situation, anything in this space with opaque financials or debt issues is being pretty savagely dealt with at the moment," he said.
Centro and its affiliates are struggling to refinance some A$3.9 billion ($3.5 billion) of debt by Feb. 15 after borrowing heavily to expand over the past two years. Its stock has fallen around 80 percent since it revealed its troubles in mid-December.
Also feeling the wrath of investors on Monday was investment firm Allco Finance on worries about the poor performance of its funds. Its shares plunged as much as 29 percent lower.
On Friday, MFS detailed plans to split its business into two listed groups and recapitalise them to reduce debt. City Pacific said on Monday it had made the decision to pull out after reviewing MFS' de-merger plan.
MFS has about A$5 billion under management. Its Stella business also operates travel agencies such as HarveyWorld Travel in Australia and New Zealand.
City Pacific said on Monday it maintained an interest in the assets of MFS's financial services division. Since announcing the plan on Jan. 14, City Pacific shares have dropped 13.2 percent to Friday's close.