25 years: Capital markets
A rights issue is an offer of shares made via the issue of rights to subscribe for new shares to existing shareholders at a fixed subscription price. In this video Rupert gives us a closer look at what a rights issue can mean from the point of view of a shareholder.
A rights issue is an offer of shares made via the issue of rights to subscribe for new shares to existing shareholders at a fixed subscription price. In this video Rupert gives us a closer look at what a rights issue can mean from the point of view of a shareholder.
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15 mins 31 secs
A rights issue is an offer of shares made via the issue of rights to subscribe for new shares to existing shareholders at a fixed subscription price. In this video, Rupert delves deeper into the granular details.
Key learning objectives:
Identify what the rights issue looks like from the perspective of shareholders
Describe the Theoretical Ex-Rights (TERP) price
Understand how participating shareholders get enhanced returns and downside protection
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The rights are issued to shareholders in proportion - or “pro-rata” - to their shareholdings, for example, one right for every two shares held - or “1 for 2” - and each right entitles the shareholder to subscribe for 1 share at the subscription price.
The expected value of a share, all things being equal, after the rights issue has completed. This is calculated by adding the total value of all of the Company’s shares - the market capitalisation - before the rights issue to the total value of the shares being issued and dividing this sum by the total number of the Company’s shares that will be in existence after the rights issue has completed.
There is often a perception that rights issues are dilutive to shareholders - but because they are fully preemptive, in any circumstances shareholders will not be diluted from a value perspective and shareholders taking up their rights in full are also not diluted from an ownership perspective. Shareholders who do not take up their rights in full however, will be diluted from an ownership perspective.
Using the example mentioned in the video, due to the discount - or locked in profit - that the shareholder who takes up rights gets, the losses suffered are smaller than for the shareholder who sells its rights. The discounted rights issue shares are providing downside protection. In fact, we can see that the share price would need to drop below the rights issue subscription price for all of the locked in profit to be eroded and the shareholder exercising rights to be worse off in absolute terms than the shareholder selling its rights.
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