Rights issues & placings

What is a rights issue?

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.

How is the pricing decided?

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.

Is it a positive or negative exercise?

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.

What action do shareholders need to take?

There are 4 options for shareholders:

  1. Take up the rights- there will be a specific date by which you must exercise your rights and pay for the new shares (Willis Owen will inform you when this is if you hold the shares on our platform). There is usually no charge for taking up your rights.
  2. Sell the nil-paid rights- you can do this once they have been ‘provisionally allotted’ to you and you can see them on your account. This will incur the usual dealing charge.
  3. Let the rights lapse- if they have any value at this point the parties acting on behalf of the company may sell them on your behalf and return the proceeds less any costs to you.
  4. Tail swallowing- this involves selling enough rights to cover the cost of taking up the remainder. It is more common in the event of a heavy rights issue.

Why do nil paid rights have a value?

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:

  • Theoretical Ex-Rights Price = (the market value of ‘old’ shares + cost of new shares)/ number of shares held post rights issue
  • If Company A shares trade at 200 pence and it has a 1 for 4 rights issue @ 150 pence per Share the calculation of the ex rights price for a holding of 1000 shares will be:
    • Original Holding 1,000 shares @ 200p = £2,000
    • Rights entitlement 250 shares @ 150p = £375
    • Ex rights price= (2,000 + 375) / 1250 = 190p per Share
    • The nil paid rights will trade at 190-150 = 40 pence but this will vary as the 200p market price moves up or down.

What is a placing?

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:

  • A straightforward placing - a simple placing can be offered to existing or new shareholders and is not pre-emptive so doesn’t need to be offered to existing holders first. It is usually limited to 5% p.a. of issued capital as per ABI (Association of British Insurers) guidelines and the discount is also limited.
  • An open offer - this is also known as a pre-emptive placing or placing subject to clawback and gives all shareholders a guaranteed right to participate. It differs from a rights issue in that there is no option to sell your entitlement in the market. The options are simply 1) take up the offer or 2) let it lapse.

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