Dod101 wrote:It may have already have been covered but following on from that the bigger the discount to the pre issue price, the less attractive the 'rights' as a rule, or to put it another way, the more risk there is in putting up the money.
Strictly speaking, the more risk
the underwriters think there is in putting up the money, or at least being willing to put it up - most rights issues don't end up with the underwriters putting up any money, just receiving their fee. On the rare occasions when they do have to make good on the guarantee they're making in the underwriting agreement, it will basically be because the share price has dropped below the subscription price, so when they do actually have to put up the money, it's always at an immediate loss (they may be saved by the share price subsequently recovering, of course, but that certainly isn't guaranteed). And the underwriting fee has to be a lot less than the money raised, since the company is better off afterwards by the money raised minus all the costs associated with the rights issue, so they are risking a loss that is much bigger than what they gain from the underwriting fee. And so they have a pretty strong financial incentive to get their opinions right about the risk of having to make good on the guarantee they're providing being low!
Anyway, my personal view is that because of that, and also the facts that they'll have had access to the books when deciding and that the occasions when they have to make good on their guarantee are indeed rare in practice, I'm much happier about letting underwriters' opinions as implicitly expressed in underwritten rights issues influence my investment thinking than I am about e.g. paying attention to analysts' opinions (let alone those of newspaper scribblers!). But there is a difference between assessing a risk oneself and being influenced by other people's assessment of the risk, and people do differ quite a lot about the extent to which they want to do the latter. So while this is one of the cases where as a general rule I personally would be happy to do the latter, others might differ about that.
However, I have just looked at the share price and I see that it has dropped to (currently) just below the subscription price of 409p, and has been quite a bit below it this morning - down as far as about 385p from eyeballing an intraday chart. If it remains there, a first-order approximation is that the rights (once they exist tomorrow) will be valueless - why should anyone want to forego a right plus 409p to acquire a share they can buy for less than 409p and nothing else (other than trading costs)? If it stays below 409p for the rest of today, that approximation would say that no value will be moved from the shareholding to the rights holding when they go ex-rights tomorrow morning, so there will be no ex-rights price drop.
That approximation won't be quite true: the rights will have some value in that case. It's basically short-term value: to see that it exists, imagine that the rights literally had zero value tomorrow. Then one could in principle buy as many as one wanted tomorrow (assuming they were on the market at all!) and it would cost one a broker commission only. And having bought them, one could then sit on them for the next couple of weeks, and if the selling price of a share rose appreciably above 409p during that time, exercise the rights to acquire shares for 409p each (plus a right each that one had paid essentially nothing for) and at the same time short-sell the same number of shares for more than 409p each (*), making a profit of the number of rights bought times the amount by which the selling price exceeds 409p. (The short-selling needed to do that would probably only require a broker who allows trading with long settlement periods, by the way - not taking any direct part in stock-lending agreements and the like.) Or one could do a rough equivalent rather more simply just by selling the rights while the selling price of a share was appreciably above 409p, because the selling price of a right would be appreciably above zero in that case.
There would of course only be a chance that the selling price of a share would go appreciably above 409p in the next couple of weeks, and if it didn't, one would just let them lapse and not expect there to be any lapsed-rights payment, so that one would end up just down by the buying commission for the rights. So overall, it would basically become a "heads I gain a small amount times the number of rights I buy minus commissions, tails I lose just a commission" bet, with the number of rights one buys only limited by their supply. Even for a very small gain per right, that can be quite lucrative on "heads" if one buys enough of them... I.e. if the rights literally became valueless, a close approximation to a "heads I win, tails I break even" bet would become available. The opportunity to make such a bet has some value - just how much depends on how likely "heads" are and how much I'm likely to win, and that's enough to make the rights have
some market value - so the rights aren't valueless after all.
That only shows that the first approximation (if the share price remains below 409p) that the rights will have no value when the shares go ex-rights tomorrow morning cannot be literally true: they will have
some value. It doesn't say how much value they'll have, nor even that one can get anything for them: if they had a value of 0.001p, for instance, you'd need a thousand rights for the rights holding to be worth even 1p, and a million or so for it to be worth anything to you after paying a typical selling commission... And while there is some mathematical theory around about how to calculate what they should be worth, it is IMHO of dubious applicability to a situation where there has been fairly major recent news, and very much to do with assessing short-term trades and thus of pretty dubious relevance to HYPs. So I won't go into it here (especially as I would have to refresh my memory of it to do so!) other than to say that it's in accordance with a couple of hints one might take from the above: the value of the rights can be expected to become less as the chances of a "heads" outcome reduce, and in particular as the price drops further (meaning that it's got to recover further for a "heads" result) and as the two weeks or so of the rights issue run out (meaning that less time remains for them to recover enough to get a "heads" result).
Anyway, if the share price stays below 409p for the rest of today (which they look like doing given the further drop since I started rewriting this section of this post after making the "
However" observation above), expect (a) the rights to have very low value after they appear when the shares go ex-rights overnight tonight, quite possibly low enough to make one's rights holding have value less than the broker commission needed to sell it, making a sale worse than pointless; (b) there accordingly to be only a very small ex-rights drop in the share value tomorrow morning, possibly even one too small to be noticeable at all. And if it is then below 409p at the end of the rights issue, also expect (c) that very few shareholders will take up their rights - basically, only a few who have totally misunderstood the situation; (d) there to be no lapsed-rights payment; (e) the underwriters to be obliged by their guarantee to buy virtually all shares being issued in the rights issue for 409p, i.e. at above market value when bought; (f) that the company therefore will still get the full proceeds they want from the rights issue; (g) that this will probably be one of the pretty rare occasions on which the underwriters do lose money on underwriting a rights issue.
I.e. basically in that situation (i.e. share price below 409p both when they go ex-rights and at the end of the rights issue), you'll basically be put into the "heads I win, tails I break even" bet without even paying a buying commission. If it stays well below 409p inbetween, it will very likely be a "tails" result; if it gets close to 409p inbetween, you might get a chance to cash in on a small win by selling rights; if it gets reasonably well above 409p, you will get such a chance on any reasonably big holding. But cashing in on those wins will require paying attention and making short-term trading decisions while the rights issue is going on. Unless you want to try that, the only sensible option will be to hope that the share price does rise above 409p before the rights issue ends - even if you do want more Kier shares, because if you want that and the share price hasn't risen above 409p, you're better off just buying the shares you want normally!
Dod101 wrote:A very large discount to the issue price, the less money will be raised and it does not mean that it is going to be more attractive for you and me. For a start, the share price may tank which it has done in this case) and secondly, the bigger the discount, usually the higher the value of the rights (which is of course foregone by a subscriber)
It's much easier to think in terms of the
total value foregone by a subscriber - i.e. the subscription price plus the price of a right per share obtained. Since the price of a right is basically (i.e. apart from
small random market fluctuations) at least the price of a share minus the subscription price (if it weren't, everyone who wanted a share would get it cheaper by buying a right and exercising it) and very little above that unless the share price drops close to or below the subscription price, normally the total value foregone by a subscriber is little different from the total value foregone by a buyer, and abnormally (as this occasion looks likely to be), it's more. The only real differences the discount chosen makes to that is that the bigger it is, the lower the subscription price will be, and so the less likely it will be that the "abnormally" case applies, and that the bigger it is, the lower the underwriting fee will be and so the smaller the gross proceeds of the rights issue need to be for the company to raise the same net amount.
As a final note just before posting, another check on the share price just before posting, the Kier share price is now around 420p and so a little above the subscription price. I won't try to edit everything above to take that into account, because by the time I did, the situation might well have changed again! But I will comment that this is easily the most attention I've paid to intraday price fluctuations for a very long time - but that has nothing to do with running my HYPs (Kier isn't in any of them), a bit more to do with the fact that this throws up that a HYP can occasionally throw its owner into a situation that is very much driven by the short term, but most of all to do with the fact that
writing about HYP decisions might need to be driven by the short term. Some details of this post will be rather out of date in little over an hour's time!
Gengulphus
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). Tick the Volume box beneath it to see the trade volumes. Bar the SETS auction at 12:24 it's mostly small trades. The Prices and Trades tab (if you select Show all for today) says just 110 trades so far.