Follow-on equity offerings and private placements Flashcards
What are the 3 different equity raising alternatives?
- Traditional Rights Issue
- Accelerated Offering
- Private Placement
What are the major descriptive points of traditional rights issue?
- Description:
* Capital increase executed via the issuance of pre-emptive rights to existing shareholders
* Subscription price at a discount to market price - Authorisations/Documentations
* Need approval from EGM
* Prospectus required - Time from Kick-off to Pricing:
* Around 3 months depending on financials availability and Prospectus approval process - Size Achievable
* Maximizes size achievable, although the larger the size the larger the discount required by the market - Best for
* Transformational M&A
* Balance Sheet Restructuring
What are the major descriptive points of accelerated offering?
- Description:
* Requires voiding of pre-emptive rights sale of new share in an Accelerated Bookbuilding to Institutional Investors (1-2 days)
* Pricing determined at the end of the bookbuilding - Authorisations/Documentations
* Need approval from EGM up to 10% and assuming authorisations in place (from Bylaws)
* No documentation up to 20% of total shares outstanding - Time from Kick-off to Pricing:
* Usually executed in 2-3 days - Size Achievable
* Up to 20% of the existing share capital - Best for
* Opportunistic Financing, with no need to raise large amount of capital
What are the major descriptive points of private placement?
- Description:
* The company issues new shares or equity-linked securities to specific investors
* Such investors could be SWF, Crossover Investors, High-Net-Worth Individuals (less common) - Authorisations/Documentations
* The new issuance of shares always requires approval
* No documentation required unless explicitly negotiated by the parties - Time from Kick-off to Pricing:
* 2-3 months - Size Achievable
* Best practise up to 10-15% of share capital - Best for
* High-growth private companies to finance the growth and bring in high-profile institutional investors ahead of IPO
What are the Pros and Cons of Accelerated Bookbuilt Offering compared to Rights Issue?
Pros:
1. Ability to access the market with limited lead time and fast execution
2. Concentrated shareholder base should facilitate preliminary wall-crossing to improve price efficiency
Cons:
1. Does not allow all existing shareholders to participate. Discount dilutive for shareholders that do not participate
2. Rarely used for transactions larger than 20% of mkt cap (full prospectus required)
What are the Pros and Cons of a Rights Issue compared to Accelerated Bookbuilt Offering ?
Pros:
1. Standard methodology for capital increases: open to all investors
2. Discount economically neutral as shareholderss can sell the rights
3. Underwritten by a syndicate of banks
4. Longer timetable allows extended marketing activity
Cons:
5. Need of a full prospectus
6. Considerable logistical exercise
7. Extended length of time before cacash received by the company
8. Recycling and marketing of rights may be cumbersome
When do companies launch rights issues?
- Balance sheet restructuring/”Emergency” rights issues:
* Distressed companies with share prices at record lows often do not have an alternative to asking existing investors to further inject capital
* If the company is in an unfavourable sector and/or in poor market conditions, a bookbuilt offering may not be possible to executive given the need of extensive marketing activity
* ABOs may not be suitable for companies in need of a large amount of equity injection - Acquisition/Organic Growth Financing:
* Across Europe, rights issues have become the instrument of choice to raise equity in large transformation M&A transactions for cash
* Potentially less controversial since current shareholders can continue to participate in the company’s growth without dilution
* Rationale/Use of Proceeds is easy to understand for existing shareholders
What are potential actions a shareholder can take in a Rights Issue?
- Take up Full Rights: investor recieves rights and subscribes in full (No dilution)
- Tail-Swallow:
* No further funds invested, no proceeds received
* Investor sells sufficient quantity of nil-paid rights in the market to pay for subscription for the remainder of his rights (Economically neutral position) - Sell Nil-Paid Rights:
* Investor sells nil-paid rights in the market, or takes no action at all
* Cash inflow to investor of the value of the nil-paid rights (Default situation with no action/Investor sees cash return in exchange for diluted position) - Sell Nil-Paid rights and existing stock
* Full exit of holding, nothing to do with the company anymore
* Adds to supply in the market from nil-paid rights, weighing on underlying price
What is the formula for TERP?
TERP (Theoretical Ex Rights Price) = (Current Price * (# Shares Outstanding) + Issue Price * (#New Shares))/(#Shares Outstanding + #New Shares)
What is the formula for the initial right value (net of the optionality) during the rights issue process?
Right Value = (TERP - Subscription Price) * [(#New Shares)/(#Shares Outstanding)]
Why is there a discount in a RIghts Issue?
Issuing the new shares at a discount to the existing share price will:
1. Make it more attractive for investors to participate in the capital increase
2. Ensure that the detached rights will have a value and trade in the secondary market facilitating recirculation
3. Reduce risk of being left with a rump (rump has to be compensated by the underwriters)
What are the Pros and Cons of a High subscription price - Lower discount in a rights issue?
Pros:
1. Could be viewed as a sign of strength
Cons:
1. Risk of failure of the rights issue and negative impact on the issuer’s reputation in case of weak share price and/or overall weak market
2. Underwriters potentially becoming largest shareholders
What are the pros and cons of a low subscription price- higher discount in a rights issue?
Pros:
1. Encourages action by shareholders
2. Lower risk of failure of the rights issue
3. Can ecnourage re-circulation of the rights
Cons:
1. Higher ownership dilution for shareholders selling their rights
2. Could be viewed as a sign of weakness if discount is excessive compared to similar previous rights issues
Is the size of the discount in rights issue relevant?
No! Be it for Ownership Dilution, Economic Dilution, EPS Dilution, The Trading Multiple.
What is the economic impact of size of discount to TERP for shareholders?
The discount in a right issue has no economic impact for the company’s shareholders:
1. The economic impact of the discount in a rights issue on the existing shareholders of a company is often misinterpreted. A rights issue avoid forced dilution of shareholders and allows them to participate in future value creation
2. To avoid dilution investors are given the choice of (i) participating in the capital increase, (ii) selling the rights or (iii) pursuing a combination of the two previous options
3. Depending on the chosen alternative, the shareholders will have a different percentage of voting rights following the share offering, but from an economic perspective, all three alternatives result in the same outcome and no economic dilution occurs
4. The “Operation Blanche” (also called tail-swallowing) is a frequently used technique in which shareholders sell a portion of the rights in order to fund the take-up of the remaining portion; a “zero-cash-trade”
5. Alternatively, the “Operation Blanche” can be viewed as (i) selling all the subscription rights and (ii) buying existing shares in the market at the Theoretical Ex-Rights Price (“TERP”)
