RE: Poleaxe28 Sep 2018 08:06
smalltrader, your description of how rights work is from Enquest. Remember, Enquest are the seller, so naturally they'll be putting a positive slant on it!
When you receive your rights next week they'll be in the form of nil paid rights shares. These are like vouchers, giving you the option to purchase more ENQ shares for a fee of 21p. These nil paid shares have value and will be tradeable on the market (probably with the ticker ENQN). Someone who buys ENQN in the market will then be able to convert to ENQ by payment of 21p, just as you can. Logically their value tracks about 21p below that of ENQ. Occasionally they can mistrack, but this tends to be brief as it gets picked up by arb traders.
The point is, the ENQN nil paid rights have value. You could sell them for cash. Therefore, if you take up the rights at 21p you've also got to include that value in your costs. The ENQN shares aren't cost free, they come at a price. The price is the drop in value you'll inevitably experience next Tuesday in your existing ENQ shares. The TERP (theoretical ex-rights price) is the price at which the fall in value of the existing ENQ shares equals the value the ENQN nil paid rights you receive.
Over time ENQ may recover in price, perhaps a short time. Psychologically the market can find it easy to drift back to a familiar price level, even though logically there's no fundamental reason for this. Sometimes it happens (e.g. FUTR recently), sometimes it doesn't (e.g. SMDS). It's governed by sentiment and the changing prospects of the company. Buts that the same with any investment. There's no inherent advantage to holders in rights issues over anyone else buying shares in the market.
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