Shares of Sabre (NASDAQ:SABR) fell 12% on Tuesday after the travel software company announced plans to sell $250 million worth of new common stock and a similar amount of mandatory convertible preferred stock. The announcement comes barely a week after a relatively upbeat earnings announcement, and seems to have caught investors off guard on Tuesday.
After markets closed Monday, Sabre said it intends to raise a total of $500 million from selling new shares of common and preferred stock, with the funding to be used for general corporate purposes. The offerings would dilute current holders by about 10%, but the stock's reaction is even worse than the dilution.
Part of the issue appears to be that the markets were not expecting this news from Sabre. The company, a former American Airlines Group subsidiary that runs airline ticketing and reservation systems, has been caught in the downdraft as airlines have seen demand plummet due to the COVID-19 pandemic.
Sabre, in its discussion of second-quarter earnings earlier this month, struck a cautious but generally optimistic tone, and management gave no indication an offering was forthcoming. Investors took a positive view on the earnings report and industry trends, but the offering seemingly has caused markets to question that optimism.
To be fair, management didn't sugarcoat the impact the pandemic has had on operations during the call. CEO Sean Menke said, "the overall travel environment remains severely depressed," part of the reason Sabre is looking to cut costs and seemingly a good argument for adding as much liquidity as possible.
Sabre is a key partner for airlines, but the business is unlikely to rebound until its customers do. With airlines expecting a multi-year recovery and traffic to not return to pre-pandemic levels until 2022 at the earliest, it likely makes sense for Sabre to add to its cash stockpile while it can, even if it causes some short-term pain and dilution for existing holders.