A rights issue can be confusing often leaving investors questioning what to do. Today I'm running through my Whitbread PLC rights issue and how I've dealt with it. Plus tips for any beginner investors.
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What's up it's adam here from trader uk.
The channel where we discuss money management and how to grow your wealth today.
I want to talk about rights issues what they are and more importantly, what to do with them if you are an investor or looking to invest, then this is definitely something that you should know about and know how to deal with before moving forward.
But before we go any further I'll, ask you to do the same thing.
I always ask, you hit the like button, leave a comment and subscribe to the channel.
So I can keep you up to date with all my future content.
Now the reason I'm making a video about rights issues, you can see on the screen it's because whitbread a company that I invest in recently announced that they would be making a rights issue.
And although I know exactly what a rights issue is and how it works.
I haven't actually been part of one in the past and given the current economic situation.
I think this is something that we'll see more and more of in the short and possibly the medium term.
So it's important that people know what to do when they're subject to a rights issue as it can actually cost you a bit of money if you're not careful so a rights issue normally takes place when a company needs to raise capital.
They need to raise funds like lots of companies do at the moment.
Of course, they have the option of going to lenders like the big banks to take out a loan to get the money that they need.
But obviously there are a number of obstacles to get in that loan.
Plus there are a number of disadvantages as well, like the cost of the interest payments that they're going to commit to so an alternative for them is to ask existing shareholders if they want to invest more money in the company.
I mean, why not right, it's a good idea, those shareholders already believed in the company enough to buy those shares in the first place.
So there's, a pretty good chance that they wouldn't mind investing a little bit more.
And if they do, then the company won't have any hefty interest payments to commit to.
So, in the case of whitbread, you can see here the area that I've highlighted, they announced that they want to raise over one billion pounds from existing shareholders.
They said that for every two shares that you own, you have the opportunity to buy one more, but at a heavily discounted price, the market value of one whitbread share is 28.50 28 pounds 50.
But under the rights issue, I can buy them at 15 pound, each which just looks like an unbelievable deal.
Why wouldn't you just buy the additional shares at 15 and then sell them straight away afterwards at 28.50 and make a huge profit from it? Well, you have to think about it at the moment, the shares that I own entitle me to a share or a portion of the company's assets and its future profits.
And if the company issues more shares, then my portion is going to get a bit smaller because those assets now have to be shared between more investors, which means it's, not quite as simple as it looks.
So I've switched across to my trading account here.
So I can show you how this was reflected in the account shortly after whitbread announced this.
I did notice a change in the account.
You can see here my investment in whitbread, plc, 15 shares currently 26 pound, a share they're at value of 391 pounds.
That's my original investment.
Then at the top, you can see the rights I have the right to buy seven shares, because I own 15 shares.
I now have the right to buy seven additional shares.
Now I've seen a few comments online from people who try to take up these rights by buying more shares through their platform.
The normal process click on whitbread, buy more and expecting them to get them at 15 pounds per share.
It doesn't work like that.
The two most important things to remember here, uh that firstly, these are not shares these seven here.
These are not shares.
And the value here does not represent the value of those shares.
Remember they're supposed to be 15 pound per share, not 11 pound.
What we're seeing here is my right to buy those shares at a discount and like owning the rights to anything it.
Usually has a value.
So this is the value of my right to buy shares at a discount.
Secondly, if you want to take up if you want to exercise your right to buy these shares, you will not do that in the normal way you buy shares your brokerage or your platform, whether you use the gyro or robinhood or trading212 should make contact with you and explain your options as the process is going to be different.
So let's, take a look at the email I received from my platform.
And it says, we would like to inform you of an upcoming, corporate action.
Whitbread have announced an upcoming rights issue for which you may find the details below exercising.
One right gives you the possibility to acquire one new share at a price of 15 pound per share new shares will be delivered under the following code rights are tradable until the 5th of june 2020, rights are tradable until the 5th of june 2020., the internal deadline for submitting your instructions is set to the 4th of june.
How do I participate in the rights issue? You have the following option.
So there are three options here participate in the rights issue trade, the rights directly on the market or no action.
So let's work through these one by one first of all participate in the rights issue.
We have our first option to do that.
You can see below if you wish to exercise your rights, we ask you to fill out the following instructions, send an email with your username and the exact number of rights that you want to exercise.
So the process is different to the normal process.
You also need to make sure you have the funds cleared in your account ready for them to deduct what's going to happen with option one.
If I take up the option to exercise the right to buy my original holding remember, I have the 15 shares in this company, they're going to devalue.
They won't be worth 28.50 per share anymore, because there are 50 more shares in circulation now.
So my new holding, which is going to be 22 shares it's going to find a new value.
And that value is certainly going to be lower than the current price.
But the loss that I will make is going to be offset by that discount that I received on the rights issue and that's, why they offer you such a big discount in the first place, in fact, the discount will normally offset the dilution, the devaluation in your shares, and then leave you with a little bit more that makes it worth your while.
And after everything is completed, I will own more shares in the company, but my proportion of ownership will be the same.
I hope that makes sense I will own more shares in the company.
I have seven more shares.
But because more shares were introduced, I still own the same proportion.
If I owned one percent before the rights issue, I'll own one percent after the rights issue, if I take up option one option, two trade, the rights directly on the market.
As I said earlier at the moment, we don't actually own these new shares, but we do own the right to buy them at a discounted price.
And that has some value.
You can see here from my trading account that the seven rights are actually worth 11 pound.
41 each at the moment, so I can go ahead and sell these rights in the normal way that I would sell shares in any company.
I would then have 79 pound 87 in my pocket.
But my shares my original shares are still going to devalue my 15 shares.
I owned before are going to entitle me to a smaller share or portion of future profits because there's going to be 50 more shares to split that profit between.
And again, that's the idea of the 79 pound.
There it's gonna compensate me for that loss of future earnings and the loss on my current holding so options.
One and two are both good options.
There is no right or wrong answer between them.
It will just depend on your personal circumstance, whether you want to invest more money to maintain your share of ownership in that company, or whether you would rather take a bit of cash in your pocket.
Then we have option three, which is the default option.
Meaning, if you do nothing, this is what's going to happen.
No action is what they call it in here, it's essentially letting your rights lapse.
And this is the option that will most likely leave you out of pocket, because if you don't execute your rights or sell your rights options, one or two, then your shareholding is going to dilute and the email doesn't mention any payment for letting them lapse, which means you'll be out of pocket.
So obviously you want to avoid this happening occasionally with some rights issues, if you let your shares lapse, you'll receive a nominal payment at some point from the company, but it doesn't mention anything about that here.
So most likely in this situation, if you take no action, you're gonna lose out.
So in summary, guys stay up to date with company news for any companies that you invest in.
So you would be aware of anything like this happening.
The whole process can be done and dusted within a couple of weeks.
So if you're not on the ball, you can miss out on your opportunity to act that's.
Everything for today.
I hope you found it useful.
Let me know if you have any questions, don't, forget to subscribe and I'll, see you next time.
The Company is undertaking a Rights Issue to raise approximately £1,009 million (gross) of additional money from Shareholders. Under the Rights Issue you will be entitled to subscribe for 1 New Ordinary Share for every 2 Existing Ordinary Shares you own at 1,500 pence per New Ordinary Share.What is the meaning of rights issue? ›
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.What is the rights issue method? ›
Procedure for right issue
The shareholders are sent the intimation via a ' letter of offer' of the right issue. The shareholders are expected to subscribe to the shares before the ' ex-record date,' generally 15-30 days. If the shareholders fail to respond to the letter of offer, the offer is deemed declined.
Because all shareholders are offered new shares in proportion to their current investment, investors who take up all their rights end up with the same share of a bigger pie, rather than a bigger slice of the same pie. If you decide not to take up all your rights, you will end up owning a smaller portion of the company.Why would a company issue rights? ›
Rights issues work by a process of the company offering additional stocks to shareholders, usually to raise capital for various reasons, for example paying down debt or creating liquidity.What is a rights issue for a public company? ›
When an issue of shares or convertible securities is made by an issuer to its existing shareholders as on a particular date fixed by the issuer (i.e. record date), it is called a rights issue. The rights are offered in a particular ratio to the number of shares or convertible securities held as on the record date.What is a rights issue simple example? ›
Example. Let us take a rights issue example where John, an existing shareholder of Company TMC, owns 20 shares of $200 each. It issues the right of shares to John and offers a discount of 30% and allows him one share for every two existing shares. As a result, John can buy ten right-issue shares for $140 each.What is the objective of the right issue? ›
The objective of the rights issue. read more is to pump in additional capital in the company compared to bonus shares that aim to increase active trading through an increase in the number of outstanding shares. It is shown as a part of the owner's equity in the liability side of the company's balance sheet. read more.What is the risk of right issue? ›
Rights issues can also be a risk as current shareholders may not wish to buy any more shares in the company if it is experiencing slower growth. The market may interpret a rights issue as a warning sign that a company could be struggling.Is a rights issue bad for shareholders? ›
Benefits and drawback of rights issue for shareholders
The company offers you an opportunity to buy more shares and increase your stake at a discounted price. But, there is a significant drawback if you don't exercise your right. The rights issue will lead to a dilution in the value of shareholders' holdings.
A right's value is calculated using the same parameters used for pricing options, including the rights subscription price, prevailing interest rates, time to expiration, and the share price of the underlying stock, taking into consideration the level of its volatility.What does rights issue mean in business? ›
What is a rights issue? A rights offer (issue) is one way a business can raise secondary capital. It involves the issue of rights to a company's existing shareholders that entitles them to buy additional shares in proportion to their existing holdings, within a fixed time period at a specified price.What is the procedure for right issue of shares? ›
The procedure for right issue of shares in the company by following the below steps: Hold a Board Meeting to approve the offer of right issue including “the letter of offer”. Send an invitation to existing shareholders regarding applying for the right issues at least 3 days before the opening of the issue.What happens if you don't apply for rights issue? ›
What happens if I don't participate in the rights issue? If you don't apply for the rights issue, the rights for these shares will expire, and once the allocation process is over, the shares temporarily credited to your Demat account will be debited.How do I sell my rights issue shares? ›
The shareholders not willing to subscribe to their rights issue can sell their rights in the open market through the rights entitlement trading platform of the stock exchange or via off-market transaction. This is known as the renunciation of rights shares.What is private company rights issue? ›
Rights issue of shares means the issue of shares by a company to the existing shareholders to mobilise additional capital to the company. A private limited company issuing further shares shall offer the shares to existing shareholders in the ratio of their holding as rights shares.What does right issue of equity shares mean? ›
A rights share issue is an offering of rights given to a company's existing shareholders, allowing them to purchase additional shares directly from the company at a discounted price, rather than buying them through the secondary market.What are the objectives of Whitbread? ›
To provide quality, affordable hotels for our guests to help them to live and work well and to positively impact the world around us.What is a rights issue to raise equity? ›
A rights issue is a type of corporate action that allows existing shareholders to buy new shares at a discounted price, usually to raise capital for the company. However, executing a rights issue is not a simple or risk-free process.