Contents

• EDITOR’S RAMBLE 🗣

• FEATURED REPORT 📰

• IN OTHER NEWS 🗞

• OPEN TABS 🌐

• STUFF THAT MIGHT HELP YOU 👌

EDITOR’S RAMBLE 🗣

Some of my favourite online content is “behind-the-scenes” stuff from the companies I like – their plans, how they work, what they're building. It makes me feel part of what they're doing.

So I want to start doing more of that with LittleLaw – I want you to feel part of what we're building too.

One of the biggest changes this year: as the team grew, we moved into a physical office space.

So if you're ever near Angel, London – we're on Upper Street – come say hello. I'd love to get you a coffee.

– Idin

FEATURED REPORT 📰

🚆 ✈️ How a war in the Middle East hit WH Smith's profits

What’s going on here?

Last week, WH Smith (the books and stationery retailer) issued a profit warning. That's when a listed company tells the stock market in advance that its profits are going to be lower than expected.

WH Smith's warning blamed the war in the Middle East. In response to this, the company raised £106 million by issuing new shares.

Why was WH Smith impacted by a war so far away?

WH Smith was a famous high street name, but over the past few years it’s shifted its focus to airport, railway-station and hospital retail.

Last year, WH Smith completed the transition – it sold all its UK high street shops to Modella Capital (a private equity firm), in a deal reported at up to £76 million. Modella rebranded them as TGJones.

Before, its success depended on whether people were still going to the high street to shop. Now, it depends on whether people are travelling through airports and train stations.

So when conflict flared in the Middle East, it hit WH Smith’s airport retail businesses in three ways.

1. ✈️ Fewer flights means fewer customers. When airspace over the Middle East closes, flights get cancelled, delayed, or rerouted. Fewer passengers passing through airports means fewer people walking past WH Smith and buying things.
   

2. ⛽ Higher fuel prices can make travel more expensive. Conflict near the Gulf can push up oil and jet-fuel prices. Airlines often respond by raising ticket prices. If flights become more expensive, some people decide not to travel, or they delay their trip. That reduces the people walking past WH Smith even more.
   

3. 😟 Travellers are spending less. People who still travel may still feel more cautious about money because of the higher ticket prices. Instead of buying extra snacks, or magazines, they might only buy what they really need. So WH Smith earns less from each customer too.

A profit warning is bad news, but it doesn’t always mean a company is in serious trouble. A strong company can usually survive one. The problem is that WH Smith already has borrowed a lot of money, and falling profit makes that debt harder to handle – companies pay off their debts out of their profits, so less profit means a smaller cushion to cover what they owe.

WH Smith could not afford to wait – so on the same day it issued the profit warning, it raised £106 million to pay back some of its debt and bring its finances under control.

How can a listed company raise £106 million so quickly?

One way a listed company can raise money is by selling new shares.

A share is a small piece of ownership in a company, so selling new shares means allowing investors to buy a new slice of the business in exchange for cash.

But there’s more than one way to sell new shares. The two main routes available are a rights issue and a placing.

WH Smith chose a placing. That means it sold new shares mainly to large professional investors, such as pension funds and asset managers, rather than offering them to all existing shareholders first.

But even though a placing is easier, you still need professional help. WH Smith didn’t personally call hundreds of investors and ask them to buy shares. It used investment banks to do that job. Their role was to speak to big investors, test demand, collect orders, and help set the final price.

In this case, WH Smith used an especially fast version of a placing called an accelerated bookbuild.

But speed has a price. WH Smith sold the new shares at 410p each. The day before, its shares had been trading at 492p. That means the new shares were sold at a discount of about 17%.

Investors were being asked to make a big decision very quickly, at a moment when WH Smith had just issued the profit warning. So they wanted a cheaper price to make the deal worth the risk.

The accelerated bookbuild is only half the reason WH Smith could move this fast. WH Smith also skipped a time-consuming step that a rights issue would have required – offering the new shares to existing shareholders first.

Why go to existing shareholders first?

When a company creates new shares to sell, the people who already own shares can get diluted.

Think of the company like a pizza. If the pizza is cut into 100 slices and you own 10 slices, you own 10% of the company. But if the pizza’s cut to create 20 new slices which are given to other people, the pizza now has 120 slices. You still own 10 slices, but your share has fallen to 8.3%.

Your number of shares hasn’t changed, but your percentage of the company has gone down. That is why company law protects existing shareholders with something called pre-emption rights.

Typically, a company can ignore pre-emption rights only if shareholders have already voted to let it do so. But in WH Smith’s placing, the new shares weren’t offered to all existing shareholders first.

How did WH Smith bypass the pre-emption rights?

Pre-emption rights usually apply when a company issues new shares for cash. But WH Smith used a structure called a cashbox to technically avoid doing that.

The basic idea is this.

📦 First, WH Smith used a “cashbox” instead of taking the money directly. WH Smith set up a small separate company – basically an empty box. Investors put their money into that box. WH Smith then issued new WH Smith shares to those investors. But technically, WH Smith was not receiving cash in return for the shares. It was receiving the box, which happened to contain cash inside it. Once WH Smith owned the box, it could access the money.

💸 In real life, this looked almost exactly like a normal fundraising. Investors paid money. Investors got new WH Smith shares. WH Smith raised cash. In practical terms, the result was basically the same as if WH Smith had simply sold the new shares to investors for money.

⚖️ But in law, that small technical difference mattered. Pre-emption rights usually apply when new shares are issued for cash. Because WH Smith technically received the cashbox company instead of receiving the cash directly, the normal pre-emption rule didn’t apply. So WH Smith didn’t have to offer the new shares to existing shareholders first.

WH Smith still needed basic permission to create new shares at all. This is called allotment authority, and listed companies usually get it from shareholders each year at their annual general meeting (or AGM). WH Smith already had that permission.

So the cashbox achieved the same commercial result as a cash share issue, but avoided the slower process of having to go to existing shareholders first.

Which law firms are involved?

Herbert Smith Freehills Kramer advised WH Smith. The banks running the placing – Barclays, Goldman Sachs and J.P. Morgan Cazenove – were advised by A&O Shearman.

How can you use this in your applications?

Here are some ways you can use the insights from this story in your law firm applications.

IN OTHER NEWS 🗞

• ⚖️ Litigation funder Innsworth has lost its court challenge over how a £200 million Mastercard settlement should be split. Innsworth funded the consumer claim, spending over £41 million. It objected when the Competition Appeal Tribunal gave most of the money to consumers. The High Court rejected all of Innsworth's arguments. The Court said class actions exist to benefit class members, not their funders. Innsworth had wanted up to £179 million. We covered the challenges with class action cases last week.

• 🚀 SpaceX has completed the biggest IPO in history, valued at about $1.77 trillion. Shares were priced at $135 each on New York's Nasdaq, topping Saudi Aramco's record set in 2019. For the first time, ordinary UK investors could buy in directly, under a new Financial Conduct Authority regime. The offer to UK-based retail investors was oversubscribed, with nearly 40% of applicants getting fewer shares than requested. Latham & Watkins advised the British and European banks running the sale. Gibson Dunn advised SpaceX.

• 💻️ President Trump has banned foreign nationals from using Anthropic's newest AI model, Fable 5, which forced the company to block it for everyone. Anthropic, the company behind the Claude chatbot, said the government cited national security concerns for the decision. The AI company said it disagreed with the order but had to obey, and warned that other models could be banned too. UK politicians warned it showed the risk of relying on American AI.

OPEN TABS 🌐 

• ⌨️ Analogue: Bring back the satisfying clack of a typewriter

• 📕 Word game: Find the hidden word that connects two others in this addictive daily puzzle

• 🔍️ Perspective: Compare the size of everything (from the tiniest particle to the largest galaxy)

STUFF THAT MIGHT HELP YOU 👌

• 💻️ Free application advice: Check out my YouTube channel for actionable tips and an insight into the lifestyle of a commercial lawyer in London.

• 📁 Law firm application bank: A growing library of real, verified successful applications for training contracts and vacation schemes. Helpful if you want to learn from others who answered the same questions you’re stuck on.

• 📝 Write winning law firm applications: A practical course to help you write clearer applications, faster. Avoid common mistakes, learn how to structure answers properly, and get lifetime access to future updates. Try it for 14 days, risk free.