Marks and Spencer Finals

[Bouleversee]

I was going to ask the same question. What usually happens to rights prices once trading starts?

[Alaric]

What usually happens to rights prices once trading starts?

They would likely follow the normal share price such that

value of rights
plus
amount to be contributed
equals
price of normal shares plus a bit for not paying stamp duty.

If the price falls far enough, the rights could become worthless.

[tjh290633]

What usually happens to rights prices once trading starts?

They would likely follow the normal share price such that

value of rights
plus
amount to be contributed
equals
price of normal shares plus a bit for not paying stamp duty.

If the price falls far enough, the rights could become worthless.

As the issue is fully underwritten, if nobody were to take up the rights they will pass to the underwriters who will then make them paid up shares and sell them at some opportune (or inopportune) moment. I think that happened to the RBS and HBOS rights issues in 2008.

There was also one of the public offers of BP shares which flopped as the share price fell below the offer price. I don't know whether HMG had found an underwriter for that offer.

TJH

[Gengulphus]

I'm going to tail swallow, I have 315 rights and following one of Gengulphus's excellent posts on the subject some while ago I've worked it out like this based on prices first thing this morning. Please let me know if there is anything awry.

315 rights @ 36p

share price was 221p

Exercise price was 185p (221 - 36)

185 is 84% of 221

315 x 0.84 = 264

sell 264 @ 36p = 95.04

Buy (take up) 51 @ 1.85 = 94.35

My general preference at that holding size would be to find the £94.35 cash to take up the 51 rights from somewhere and take them up, but not sell the remaining 264 rights. Instead, just let them lapse and take the lapsed-rights payment in a few weeks time, which will probably raise more cash than selling them because it doesn't involve paying a commission - if that works out, one will end up effectively just having 'borrowed' the £94.35 from elsewhere rather than having taken it properly.

It's only a general preference because it does depend on having somewhere to 'borrow' the £94.35 from, and assuming that a lapsed-rights payment of at least (£94.35-commission)/264 will be made. If the commission is £10, for example, that means one of at least 31.95p per right. As a general rule, the rights price is a guide to what the market expects the lapsed-rights payment to be, so that would strike me as a reasonably good gamble. But I'll agree that it is a gamble, so it's only my preference - i.e. it's what I would do, but not something I can be certain will produce a better outcome.

What I would definitely suggest is that if you want to come out of this genuinely neither having added cash to the holding nor removed it, you need to take the selling commission into account in your calculations - it's almost certainly quite significant compared with the amounts of cash involved in the transactions, so will make an appreciable percentage difference to the results.

Gengulphus

[jimleigh]

I have held M&S in certificated form since 1998 and also hold online in a SIPP & ISA. Following 40%ish drop in value and 40% drop in dividend, I shall be letting all my Rights lapse and looking at the proceeds as a small compensation. I shall be holding onto all my M&S shares in the hope of future recovery, but the 40% cut is too much of a black mark to consider adding any more for now.

[GoSeigen]

I shall be taking up my rights in full. I believe M&S will be one of the survivors of the High Street/Brexit carnage and want to participate fully in any future upside.


GS

[Gengulphus]

What usually happens to rights prices once trading starts?

They would likely follow the normal share price such that

value of rights
plus
amount to be contributed
equals
price of normal shares plus a bit for not paying stamp duty.

If the price falls far enough, the rights could become worthless.

As the issue is fully underwritten, if nobody were to take up the rights they will pass to the underwriters who will then make them paid up shares and sell them at some opportune (or inopportune) moment. I think that happened to the RBS and HBOS rights issues in 2008.

There was also one of the public offers of BP shares which flopped as the share price fell below the offer price. I don't know whether HMG had found an underwriter for that offer.

A more recent example is Kier's rights issue in December last year, discussed in this thread. That discussion petered out before the end of the rights issue, but the outcome was that the market price of the shares remained below the subscription price of 409p until then, only 37.66% of the rights were subscribed for (presumably mostly due to already having agreed to subscribe and being unable to retract, though some shareholders might have just have failed to pay attention) and the subscription price for the remaining 62.34% was paid by the underwriters.

Those who took up rights and the underwriters did get the opportunity to make a decent profit on the deal, as the market price of the shares recovered to over 500p for much of January and February, but it fell below 409p again in March and fell again last month - it's now under 300p. But the main underwriters didn't take it - they quickly placed their shares at 360p per share, taking a loss of 49p on each such share. With them taking that loss on 28,101,162 shares, that was a pretty big loss! - which was the loss that the underwriters took their substantial fees to insure against. And if they hadn't done so, their opportunity to take a profit would probably have been largely illusory, since selling that number of shares in a short period would have driven the share price down pretty strongly...

Gengulphus

[Bouleversee]

Is that why M&S had to pay fees of £30m in this connection, do you suppose?

[monabri]

Those who took up rights and the underwriters did get the opportunity to make a decent profit on the deal, as the market price of the shares recovered to over 500p for much of January and February, but it fell below 409p again in March and fell again last month - it's now under 300p.
Gengulphus

True, Kier are currently 161p.

[Gengulphus]

Those who took up rights and the underwriters did get the opportunity to make a decent profit on the deal, as the market price of the shares recovered to over 500p for much of January and February, but it fell below 409p again in March and fell again last month - it's now under 300p.

True, Kier are currently 161p.

Indeed! If I owned Kier shares, a crystal ball would have been very useful last Friday, even one that could see just three days into the future - and even one that could just see 17.5 hours into the future would have been of some use when I posted that! ;-)

Gengulphus

[Fluke]

and following one of Gengulphus's excellent posts on the subject some while ago I've worked it out like this

You couldn't point me at that post, by any chance, could you? Or even give me a clue as to where to find it?

MDW1954

Not the original thread but this one refers to it, this is an extract from IanTHughes post and it's this that I followed to get my figures:

viewtopic.php?f=15&t=11944

Gengulphus did indeed do a fantastic write up on this and I cannot match it for elegance or completeness but I can tell you how to work out how to determine the numbers for tail-swallowing

1) Calculate the number of rights you will receive (round down to the nearest whole number)
2) Calculate the expected price of each right (current Share Price MINUS Exercise Price)
3) Calculate the Rights Price as a percentage of the Share Price
4) Multiply the number of Rights that you have by the Rights Price percentage (Round Down to nearest whole number)

Hey presto you will have the number of Rights that you can exercise while leaving a sufficient number that can be sold to raise the funds needed.

[MDW1954]

and following one of Gengulphus's excellent posts on the subject some while ago I've worked it out like this

You couldn't point me at that post, by any chance, could you? Or even give me a clue as to where to find it?

MDW1954

Not the original thread but this one refers to it, this is an extract from IanTHughes post and it's this that I followed to get my figures:

viewtopic.php?f=15&t=11944

Gengulphus did indeed do a fantastic write up on this and I cannot match it for elegance or completeness but I can tell you how to work out how to determine the numbers for tail-swallowing

1) Calculate the number of rights you will receive (round down to the nearest whole number)
2) Calculate the expected price of each right (current Share Price MINUS Exercise Price)
3) Calculate the Rights Price as a percentage of the Share Price
4) Multiply the number of Rights that you have by the Rights Price percentage (Round Down to nearest whole number)

Hey presto you will have the number of Rights that you can exercise while leaving a sufficient number that can be sold to raise the funds needed.

Thanks, Fluke.

I have a formula from back in the Motley Fool days, which is giving me a different answer. I suspect it's a terminology problem.

Not a problem re: MKS, because I'm taking up the rights in full, but certainly something that I need to sort before too long.

But thanks again for your reply. Most helpful.

MDW1954

[idpickering]

I shall be taking up my rights in full. I believe M&S will be one of the survivors of the High Street/Brexit carnage and want to participate fully in any future upside.


GS

Good luck GS. You're braver than me obviously. IMHO retail is in it's autumn as a reliable investment and dividend provider. I have no retail shares now, and recently bought into DC Smith (SMDS) as they seem to provide the packaging that a lot of people purchase via the internet, such as my wife.

Ian.

[Fluke]

I'm going to tail swallow, I have 315 rights and following one of Gengulphus's excellent posts on the subject some while ago I've worked it out like this based on prices first thing this morning. Please let me know if there is anything awry.

315 rights @ 36p

share price was 221p

Exercise price was 185p (221 - 36)

185 is 84% of 221

315 x 0.84 = 264

sell 264 @ 36p = 95.04

Buy (take up) 51 @ 1.85 = 94.35

My general preference at that holding size would be to find the £94.35 cash to take up the 51 rights from somewhere and take them up, but not sell the remaining 264 rights. Instead, just let them lapse and take the lapsed-rights payment in a few weeks time, which will probably raise more cash than selling them because it doesn't involve paying a commission - if that works out, one will end up effectively just having 'borrowed' the £94.35 from elsewhere rather than having taken it properly.

Gengulphus

Yes thanks, this is what I had decided to do, so that last line should be 'sell 264 @ 36p = 95.04 - or let lapse'. And yes quite right, the above does not take into account commission.

[Breelander]

At last I have both notifications of entitlement so it's decision time. Has anyone changed their mind as regards taking up the rights or not?

...I intend to take it up in full.

I have decided to let the rights lapse and take the cash instead.

This is not a reflection on the merits of the rights issue or the decision of others to take up the rights, it's probably a good deal.

No, my decision is more driven by the work required to recalculate the number of my Income units being not worth the small potential gain from taking up the rights.

[tjh290633]

I have decided to let the rights lapse and take the cash instead.

This is not a reflection on the merits of the rights issue or the decision of others to take up the rights, it's probably a good deal.

No, my decision is more driven by the work required to recalculate the number of my Income units being not worth the small potential gain from taking up the rights.

Are you not going to have to do that if you let the rights lapse? Taking them up doesn't affect the status quo, if you have enough accumulated dividends. They are rolling in this time of year.

TJH

[Breelander]

Are you not going to have to do that if you let the rights lapse?

Not for Income Units, which are the only type I calculate. Cash is received outside the units, while to take up the rights I would have to value the entire portfolio to get a unit price, then 'purchase' new units with the cash used to take up the rights. Too much work for (in my case) a relatively small number of rights.

[tjh290633]

Are you not going to have to do that if you let the rights lapse?

Not for Income Units, which are the only type I calculate. Cash is received outside the units, while to take up the rights I would have to value the entire portfolio to get a unit price, then 'purchase' new units with the cash used to take up the rights. Too much work for (in my case) a relatively small number of rights.

I always convert dividends into new units each month, except if I withdraw cash. It's automatic, so no extra effort required.

I assume that it's done once a month at the price at the end of the previous month, to avoid a circular calcuation. Near enough for my purposes.

TJH

[Gengulphus]

Are you not going to have to do that if you let the rights lapse?

Not for Income Units, which are the only type I calculate. Cash is received outside the units, while to take up the rights I would have to value the entire portfolio to get a unit price, then 'purchase' new units with the cash used to take up the rights. Too much work for (in my case) a relatively small number of rights.

I always convert dividends into new units each month, except if I withdraw cash. It's automatic, so no extra effort required.

I assume that it's done once a month at the price at the end of the previous month, to avoid a circular calcuation. Near enough for my purposes.

There is something wrong with your calculation method - you don't describe what you're doing precisely, but the correct method is for adding cash to buy additional units is:

1) Value the portfolio as it exists excluding the added cash at current prices, not at out-of-date prices;

2) Divide the result of step 1 by the current number of units to get a unit price;

3) Divide the amount of cash added by the result of step 2 to get the number of units added;

4) Add the result of step 3 to the current number of units to get the new number of units.

Or as a formula, Nnew = Nold + C / ((V-C)/Nold), which simplifies to Nnew = Nold * V/(V-C), where Nold and Nnew are the old and new numbers of units, V is the current value of the portfolio including the added cash, and C is the added cash.

There is nothing circular in that, and it doesn't involve using out-of-date prices.

By the way, I do accept the fact that the errors using the previous month's prices for added cash equal to a month's dividends are small (usually tiny) and over long periods can be expected to roughly cancel each other out. But I don't see the point of incurring them at all when it is so easy to avoid them!

Gengulphus

[daveh]

Are you not going to have to do that if you let the rights lapse?

Not for Income Units, which are the only type I calculate. Cash is received outside the units, while to take up the rights I would have to value the entire portfolio to get a unit price, then 'purchase' new units with the cash used to take up the rights. Too much work for (in my case) a relatively small number of rights.

In general I don't count capital returns as income, unless they are small, and would allow them to roll up inside the portfolio. In this case if I'd allowed the rights to lapse it would have been small (I think it would have been under £100) and I would have added it to the dividend income and I would have included it in the usual monthly calculation of new units for income units and would have just added to the value of the portfolio for accumulation units as I'm reinvesting all returns at the moment.

In this case I am taking up the rights and am using uninvested dividends sitting in the portfolio so it will make no difference to my calculations as no money is going into or out of the portfolio and the monthly income unit calculation with the months dividends will occur as normal and will be unaffected by the rights issue.


In comment to Gengulphus who has posted whilst I was writing this, like TJH I only do my income unit calculations once a month. So for example this month I will receive say £2000.00 in dividends on dates ranging between 3/6 and the 26/6 but I don't calculate my new income units until the end of the month when I work out the portfolio value and the number of new units that June's dividend income would buy. I do it this way for two reasons:

1) I don't want to have to make a portfolio valuation and unit calculation every day a dividend is paid.

2) I didn't initially calculate income units and the only way I could retrospectively do it was using the monthly dividends and end of month portfolio valuation as I had that information readily to hand, so I kept doing it the same way for consistency.