Lloyds Share News (LLOY)

Almost three million shareholders will have some tough decisions to make over the next few weeks after Lloyds Banking Group yesterday priced its colossal £13.5bn rights issue.The bank is offering the 2.8 million private investors on its share register, the largest shareholder base in Britain, the chance to buy shares for 60% less than their value on Monday night.They'll get 1.34 new shares for every 1 share held at 37p each. Someone with an average 740 shares will be eligible for 991 of the new ones at a cost of just under £367.The theoretical ex-rights price (TERP), or what the shares are likely to trade at once the number of shares in issue has been recalculated, is 60p. But Lloyds said earlier this month it would offer them at either 15p, or a discount of between 38% and 42% to the TERP, yesterday confirmed as 38.6%, whichever was the higher, hence the 37p.Lloyds wants the money so it can avoid being tied into the government's £260bn toxic asset protection scheme. The Treasury is taking up its rights as part of the issue, investing £5.7bn net of an underwriting fee, to keep its stake in Lloyds at 43%. So, what to do?Whenever a company decides to raise money via a rights issue shareholders have four choices. Each has its benefits, but the final decision will depend on what confidence an investor has in the business' prospects and their own personal circumstances.First option, and the most simple, is do nothing. Your rights have an intrinsic value, so if you can't afford to buy the new shares, don't fancy throwing good money after bad, or just can't be bothered, you'll eventually get a cheque for the difference between the offer price (37p) and the share price when the whole process has finished.Many investors will have become accidental shareholders in Lloyds, having acquired the shares through demutualisations of the Halifax, Cheltenham & Gloucester and Leeds Permanent building societies. A lot of them won't want to pump more cash into Lloyds, or any bank, following the recent market turmoil. If you're feeling a little more energetic, but either don't want to or can't afford to buy more shares, the second option is to sell your rights. Lloyds will sell your nil-paid rights for you, or you can go through a broker. If you owned an average 740 shares and sold your rights at 23p, you'd get about £170.The nil-paid shares rights will begin trading on 27 November.There's a third option if you want to avoid forking out any extra cash, but still want to take up some rights. Shareholders could sell enough of their nil-paid rights to fund the purchase of whatever rights they have left, a process known as "tail swallowing". Lloyds says it will help those who like the idea.Finally, the brave investor might decide to take up their allocation, although the current consensus is that few of them will. Documents will be sent out after tomorrow's general meeting in Birmingham at which institutional investors are expected to make sure the scheme is passed.All shareholders will receive a provisional allotment letter letting them know exactly how many shares they own and what they'll be entitled to through the rights issue.Not made up your mind yet? Jonathan Jackson at broker Killik Capital thinks the shares will remain volatile in the short term, with potential upward pressure from the unwinding of short positions and the prospect of UK institutions upping their holdings in the stock to achieve an index weighting. "In the medium term, however, the shares remain a pure play on UK economic growth (on which we remain cautious) and the ability of management to extract better-than-expected synergies from the HBOS acquisition," he says. There's also the risk that banking sector returns may be capped by the regulator.Charles Stanley doesn't think investors should take up their rights just to avoid dilution. They must believe that additional funds invested will earn a better return than if they were invested in an alternative stock.The broker says Lloyds has a strong franchise which, if managed properly, "is likely to be a powerful force on the UK high street". "However, the next couple of years are still likely to be difficult and of course the Group is unlikely to pay a dividend until at least 2011. Our Hold recommendation on the stock remains and therefore we recommend that shareholders sell sufficient nil paid rights in order to take up the balance of their entitlement." Last deadline for the offer is December 11 and the new shares will start trading three days later.