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A rights offer (issue) is one way a business can raise secondary capital. It involves the issue of rights to a company’s existing shareholders that entitles them to buy additional shares in proportion to their existing holdings, within a fixed time period at a specified price. If a holder takes up their entitlement in full they will own the same percentage Share of the company as they held previously.
Rights are usually priced at a discount to the prevailing Share price to encourage take up. The more money a company wants or needs to raise the ‘heavier’ the issue so, for example, a 1 for 2 is heavier than a 1 for 10. Usually, the more substantial the rights issue the greater the discount to the market price at which the new shares are offered. However, prevailing market conditions and anticipated demand for the shares are also factors in determining pricing.
A rights issue can be raised for a number of reasons. For example, a company may have identified an acquisition target or could need money to fund the development of an attractive growth opportunity in its markets. On the other hand, a company may have poor Cash generation and need the money to strengthen its balance sheet or even stave off financial collapse.
There are 4 options for shareholders:
The nil paid shares will commence trading at a price which equates to the difference between the ex-rights price and the price of the new shares. Subsequently, they will fluctuate with the price of the old shares until the rights issue completes and they become one Share class. An example of how to calculate the theoretical ex-rights price is shown below:
A placing is an alternative way of raising secondary capital. Placings are usually used for smaller fund raisings as they are simpler and cheaper with less administration required than for a rights issue. No prospectus is required if less than 10% of the total equity value is raised and a restricted prospectus for larger amounts.
There are 2 types a straightforward placing or an open offer:
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