Company in the news: Mothercare

Back in May, I tipped shares in troubled retailer Mothercare (LSE: MTC)at 139p. The shares are now 245p, having seen a 300p per share takeover approach from US company Destination Maternity rebuffed in July.

I argued, at the time, that Mothercare's international business was a hidden gem due to the company's loss-making UK stores. I also said that there was a risk that the company might have to ask its shareholders for more money to help it fix the problems in the UK.

This has come to pass with the announcement of a £100m rights issue, on Tuesday this week. This gives existing shareholders the right to buy nine new shares at 125p for every ten shares that they already own.

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The money raised will be used to pay off all the company's debt. On top of that, up to 75 UK stores will be closed and a better internet business will be created.

I think this is good news and may attract another bid for the company. At a theoretical ex-rights issue price of 188p that's the expected price after the rights issue the company would have a debt-free market value of around £317m, which is arguably less than the international business is worth.

Verdict: buy and take up rights