Rights is­sues

Finweek English Edition - - INVESTMENT -

We’re see­ing an­other spate of rights is­sues on the JSE, so we thought we’d look into their work­ings as they are an im­por­tant part of the mar­ket and in­vestors need to un­der­stand the im­pli­ca­tions and re­spon­si­bil­i­ties of own­ing th­ese in­stru­ments.

A rights is­sue is a process whereby a com­pany is­sues new shares for cash as a fund-rais­ing ex­er­cise. The com­pany has to of­fer th­ese new shares to ex­ist­ing share­hold­ers but they can ef­fec­tively de­cline and we will delve into this process.

But first, why a rights is­sue? A loan is the prefer­able method of rais­ing cash as it gets paid back and has no long-term im­pact on the com­pany. A rights is­sue, on the other hand, re­sults in new shares be­ing is­sued and th­ese new shares have a life­long right on prof­its, ef­fec­tively di­lut­ing the ex­ist­ing shares.

For e xam­ple, i f a com­pany has 1 000 shares in is­sue and prof­its of R100, mean­ing profit per share is 10c. The com­pany is­sues a fur­ther 1 000 new shares and sud­denly the profit per share drops to 5c – this is di­lu­tion. The profit has not in­creased but the num­ber of shares en­ti­tled to a slice of the profit has in­creased. So a com­pany only goes the rights is­sue route as a last re­sort. The Su­per Group dou­ble rights is­sue worked very well and the share price has moved strongly since while Curro rights is­sues have had no im­pact on the share price rise. Blue Fi­nan­cial, on the other hand, sur­vived but the share price is back where it was when the is­sue hap­pened, although it did rally strongly in the year fol­low­ing the rights is­sue. So while it does help a com­pany sur­vive, it may not help the share price.

The t wo most re­cent rights is­sue an­nounce­ments have come from Gijima and RBA Hold­ings, with the former of­fer­ing 3bn new shares when it cur­rently has just un­der 1bn in is­sue. This is mas­sive di­lu­tion and in­di­cates that the com­pany is strug­gling.

The sec­ond part of the rights is­sue is the take-up price and the trad­ing of the nil paid let­ters (NPLs) on the JSE. The new shares will be is­sued at a take-up price, es­sen­tially the price at which in­vestors will buy the new shares. This price is nearly al­ways at a dis­count of sorts to the ex­ist­ing share price. Gijima’s take-up price is 5c and the share was trad­ing at 15c at the time of an­nounce­ment while the RBA take-up is 8c and the share had been trad­ing at around 11c.

Ex­ist­ing share­hold­ers will be given NPLs in the spec­i­fied ra­tio; with Gijima it is 309 for ev­ery 100 share cur­rently held and th­ese NPLs will trade as GIJN (the N de­not­ing NPL). GIJN will trade freely on the JSE and one can ei­ther ex­er­cise them (and buy one new GIJ share at 5c for ev­ery GIJN owned) or they can be sold on the open mar­ket. The NPL price would be the GIJ price less the take-up price, so with GIJ at 12c the GIJN has a value of 7c. One could buy th­ese NPLs and ex­er­cise them as a way to get GIJ shares al­beit this is un­likely to be any cheaper than just buy­ing GIJ.

Very im­por­tantly, th­ese NPLs have an ex­piry date that would have been pub­lished with the SENS an­nounc­ing the con­firmed de­tails of the is­sue. A holder of the NPL has to ei­ther sell the NPL or in­form their bro­ker they wish to take up the rights on or be­fore that date oth­er­wise the NPL ex­pires with zero value.

The main is­sue to watch out for is the level of di­lu­tion, and with Gijima it is mas­sive. Also have a look at which of the ma­jor share­hold­ers are sup­port­ing the rights is­sue; this al­ways gives an in­di­ca­tion of who is putting their money where their mouth is. An ex­ist­ing share­holder has to de­cide if they will fol­low their rights and take up the new shares or if they would rather sell the NPLs, ef­fec­tively di­lut­ing their cur­rent hold­ing. Ei­ther way you must ei­ther in­form your bro­ker or sell the NPLs be­fore the ex­piry date.

Simon Brown is a Fin­week con­trib­u­tor and heads ju­s­tonelap.com, a free re­source of fi­nan­cial in­for­ma­tion and in­vest­ment ed­u­ca­tion.

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