New Share Issues Flashcards
Rights issues
A rights issue is an invitation to shareholders to buy new shares in proportion to their existing holding of shares (pre-emption rights), ensures existing shareholders are always given first
refusal on new shares. Rights issues are often not good news, and are typically done in order to repay a debt or refinance the company.
Rights issues are described as a ratio between new and existing shares and are offered at a discount to the existing market price of the shares
Theoretical ex-rights price
The ‘theoretical ex-rights’ price is the price of the shares after the rights issue has taken place (new price). Because the shares are issued at a discount to the current market price, the effect will be to lower share price
Theoretical nil-paid price
The ‘theoretical nil paid price’ is the price an investor would (theoretically) pay for the right to buy a discounted share (in the rights issue)
If the ex-rights price is £1.96, the selling price (rights subscription) is £1.80, the difference is the ‘theoretical nil paid price’ of £0.16.
Reasons for a rights issue
To finance a specific acquisition (ie. a “target” company, for commercial expansion or ongoing capital investment,
To reduce debt, or
To strengthen the balance sheet (ie. after poor management decisions!)
Swallowing the tail
Some investors may want to sell some of their rights and take up the offer with the money they make. This is called Swallowing the Tail, and it uses the following formula:
Number of rights x subscription price / theoretical ex-rights price = number of rights you need to sell to take up the remainder.
Bonus issue
A bonus issue is a method of issuing new shares to the existing shareholders where new shares are issued without cost (there is no new equity investment needed).
The effect of a bonus issue is to dilute the existing market price of a share and has the effect of reducing the price and making it more attractive to investors.
The key point is that the market capitalisation/funding is not affected by the bonus issue – there are just more shares spread across the capital.
Share split
A share split is where shares in issue are split into a greater number, each with a smaller nominal value: one £2 ordinary share is split into two £1 ordinary shares.
The effect is the same as a bonus issue: the total value of the company is spread over a larger number of shares (with a lower market price.
Share consolidation
The opposite of a share split is a share consolidation, where existing shares are consolidated into a smaller number, each with a higher nominal value (as RBS did in 2012 after the credit crisis when the share price dropped so low).
Share buy-back
The purchase by a company of its own shares is called share buy-back. Regulatory as well as shareholder approval is required before a company is allowed to buy back its shares, but
this can be done. In fact, business protection policies on director/shareholders for company share buy-back can be put in place – and this is where it is used most frequently.
Buy-backs increase share price for a couple of reasons, broadly by reducing the number of shares in the market.
They’ve been recently criticised, with companies accused of increasing share prices via buy-backs rather than increasing profitability of the company.
