Member Info for Poleaxe

Thanks casapinos,. Yes, I realise the primary driver of the rights price are the underwriters but I was wondering whether ratty understood this.

As long as the rights doesn't bomb (in this case meaning the ex-rights price on 28th isn't below 32p) then the underwriters won't have to pick up any of the rights not taken up. They'll get placed in the market, with the proceeds less 32p and some minor costs returned to the holders as lapsed rights proceeds.

If the rights were to bomb completely the underwriters would stand to pay £2bn to pickup all the rights shares. With the rights priced at 32p per share this would give them 10/13 (77%) of the shares in the company. Had the rights been priced at 106.67p they only get 1/2 (50%) of the company for their £2bn. They've therefore done a risk assessment and, based on their £55m fees, decided on 32p. Perhaps they'd have been willing to do a higher price but for a higher fee. I can see how the underwriter's low risk appetite can undermine confidence in the company.

Given that it doesn't matter what price the rights are done at from an investor perspective (if you're taking up the rights in full it's the same outlay to maintain your current stake. If you're tail swallowing you incur the same dilution) I wonder if it's largely a psychological play. In theory it should make no difference to the market cap of a company what price it issues shares at to raise £2bn. However, if the rights price is set low it may affect market confidence and in the short term result in a lower market cap, whether it's justified or not.

The psychology of rights is complicated and leads to a lot of confusion.

That's correct joe, but that assumes a flat market.

As we've seen, with all the confusion a rights issue generates the share price can flap all over the place and no-one can tell you with any certainly whether it will be cheaper to buy the shares now and take up the rights or simply buy the shares after 28th, when they trade ex-rights. It's therefore a trader's dream.

If I were a potential investor I'd be watching for a dip on the morning of 12th November, when the rump gets placed.

Don't let the ignorant posters on bulletin boards mess with your mind!

Absolute rubbish! Unlike an open offer the rights have a value and are tradable shares (possibly under the ticker RRN).

If on 27th RR. trade at 225p you can expect them to trade ex-rights on 28th at about 76.5p. The nil paid rights shares will then trade at about 44.5p.

You get 10/3 nil paid shares per RR. share. In other words, if you don't take up the rights you can sell them for about 148p per RR. share held on 27th. That's a lot more than nothing!

And what's the problem with 'dilution'?

Sure, if you don't excercise the rights in full your stake in the company has reduced. You'll receive payment (hard cash) to compensate you.

If you want to retain your existing investment you can tail swallow (selling some of the rights to fund taking up the remaining rights).

Only exercise the rights if you think the shares are a good investment, because the total cost of excercising the rights is 32p plus what you could have otherwise got selling your rights entitlement. That cost will be about the same as simply buying the shares in the market like anyone else.

Rights issues are a conjuring trick. It's classic misdirection, drawing your attention to one hand (the discount) whilst taking away from the other (the dip on ex-rights day). Too many PIs don't seem to spot this.

As stated before, most PIs can ignore the record date. It's an administrative event for despatch of the provisional allotment letters. If you have a nominee account with a broker it's really no concern to you. All that matters if you're buying and selling RR. shares is the ex-date. The ex-date is the cut-off date which defines whether the shares are traded with or without the benefit of receiving the rights shares.

Ratty, you call it a desparate RI price. What do you suppose determines the setting of the rights exercise price? I ask because from an investor's viewpoint it makes no difference what the price is. Many PIs don't seem to get this and get taken in by the rights discount.

If I hold 1% of RR. and the company wants to raise £2bn, the company have come begging to me to buy £20m worth of new shares. It doesn't make any difference to me what price they sell those share to me at. If I take up the rights I'll still own 1% of the enlarged company.

If RR. are raising £2bn, why would the price they issue the new shares at affect the resulting market cap? £2bn cash is £2bn cash, whatever price they issue the shares at. Therefore my 1% of the company is worth the same, whatever the rights issue price.

Potentially the company could do a rights issue at the current market price. It would be no less profitable to you than taking up the rights at 32p. The company are simply begging you to buy new shares from them and dressing it up as discount to mess with your mind. IMO rights are a devious con and mis-sold to many PIs.

Only buy shares if you think the investment timing is good, not for the rights discount. The discount is smoke & mirrors and doesn't really exist.

I've heard this all before with other companies. It doesn't happen and shareholders lose their shirts. When was the last time the government bailed out ordinary shareholders?

Whilst the company may have strategic importance and get rescued in some way, the ordinary shareholders do not.

As a shareholder you take on risk. In return for the potential upside you have to accept the potential downside. Why should taxpayers provide wealthy shareholders with guaranteed stop losses? That's the political reality.

IG have produced a reasonable overview. It includes:-

"If you hold a Rolls Royce position on the close of business on 27 October then we will book the new rights on your account on the Ex-Dividend Date on 28 October."

Hopefully no-one will now be tempted by Ratty's 'cunning plan' to sell before 28th and still secure the rights!

https://www.ig.com/uk/news-and-trade-ideas/rolls-royce-share-price--what-you-need-to-know-about-upcoming-ri-201016

Another thing to ask is, would you be taking up your rights if they were 2 for 3 at 160p? Would you find the rights less attractive at this price? If so, you're letting the rights price mess with your mind. It makes no difference to your investment commitment or your stake in the company.

FWIW, my view is you only take up the rights if you consider the shares to be a good investment, not because of the rights discount.

Forget about the 'dilution' and the average price it will give you. That's the rights discount price messing with your mind! In reality the overall cost to you of taking up the rights will be much the same as it will be for someone else buying the shares ex-rights (remember you forgo the cash you could have otherwise received selling the nil paid rights). Therefore ask yourself, would you be a buyer of the shares ex-rights, or is it simply the temptation of shares which apparently only cost you 32p?

Yes, I love Ratty Baldrick's cunning plan. What could possibly go wrong?

That's absolute misleading tosh RattyRy. Do you really think you have the power to manipulate RR. shares? All you're doing is confusing less knowledgeable investors and possibly leading them to make poor decisions.

How about you undertake to compensate anyone who sells their shares bewteen 23rd and 28th and doesn't receive the rights?

solaris, once you get your rights you won't be able to sell RR. at anything like 220p. As it stands at the moment they'll be more like 75p and the rights will be worth about 43p, were you to sell them rather than take them up.

What you're trying to do is called 'tail-swallowing'. It maintains your existing investment in the company, although not the same stake in the company (percentage of the company's shares).

Some people sell some of their nil paid rights shares in order to fund taking up the remainder. There's a simple calculation to do this:-

Number of rights held * issue price / TERP (RR. share price when trading ex rights)

So in your case with your 3,333 rights and based current RR. price of 220p that would be:-

3333 * 32p / 75.385p = 1415 nil paid rights to sell

These rights would sell for about 43.385p, giving you 613.82 to invest in taking up the remaining 1918 rights at 32p.

There are no fees to take up rights.

Whilst brokers may tell you you options but they don't give you advice. I think many people are tempted by the 'cheap' shares. I wonder how many don't realise they're not really cheaper than for someone else buying in the market ex-rights.

The problem with the dates is it includes the "Record Date". This relates to back office procedure and irrelevant for most investors nowadays. I almost wonder if it's deliberately put there to confuse!

It's similar to the record date on dividends. Most dividends go ex from open on a Thursday but the record date is the following day (this relates to the clearing procedure delay). However, anyone selling on Thursday will receive the dividend, anyone buying won't. It's the ex date that matters.

Given the amount of confusion there is with private investors over rights issues, should they be allowed? In this day and age, with our compensation culture, there must be a good argument to say rights are getting mis-sold.

Suspension? No.

Brokers will probably won't your instructions and funds a few days before the 11th Nov deadline, so perhaps by 6th.

Your entitlement is based on your holding at close on 27th. No way they'd want money or instructions before 28th Oct. The rights won't be credited to your account until 28th, and likely a day or two later with many brokers.

Yes. These 'new shares' don't exist until they go ex and are not fully paid until 12 Nov.

The reson the price falls on 28th Oct is the shares no longer come with the benefit of being able to subscribe for the rights at 32p. In a sensible market that fall offsets the benefit of the rights, so overall you're no better or worse off between 27th and 28th.

The drop in value in the RR. shares is compensated by the value of the nil paid rights shares you receive. If you wish you can sell these shares in the maket (ticker possibly RRN) and get roughly the amount you've dropped in RR.