finweek

Rights issues: Putting investors in a tricky position

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Simon Brown, founder and director of JustOneLap.com.
Simon Brown, founder and director of JustOneLap.com.

Taste Holdings is doing another rights issue, this time to raise R398m by way of new shares at 90c each. 

This equates to some 442m new Taste shares while there are currently just over 459m shares in issue. 

In other words, massive dilution if you don’t follow your rights.

This is also the company’s fifth rights issue in as many years. It raised R226m in late 2015, issuing 75m shares at 300c a share. 

There was also  the September 2014 issue that raised R180m, with 60m shares also placed at 300c each, R95m in April 2015 with 31m shares at 305c each and finally, earlier this year it raised R120m by way of 80m new shares at 150c each.

I want to use Taste as an example of how rights issues increase the number of shares in issue and as such put shareholders in the position of either having to add more money into the investment by taking up their rights, or seeing themselves diluted as shareholders of the company.

If we go back to mid-2014, before any of these rights issues, Taste would have had some 245m shares in issue. 

If you were a large investor and bought, say, 1m shares at 300c each, you’d have owned some 0.4% of the company, while the market capitalisation would have been around R735m.

Now let’s assume you never partook in any of the rights issues that followed. You’d still have the 1m shares, but after this latest rights issue there will now be around 935m shares in total. 

Your holding now only represents 0.1% of the company, and your investment is worth around R800 000 as I write. 

Your initial holding in the company has reduced by 75% from 0.4% to 0.1% and as such you have fewer rights over profits and dividends.

Most often smaller investors don’t really concern themselves with this dilution, but it is real. The bottom line is that any future dividend will be a quarter of what you expected. 

If you opted to not take up your rights, you could have sold them (though many priced below the current share price had no value), and this would have netted some income, reducing your initial R3m investment. But not by a lot.

The alternative would have been to support each of the rights issues as per your allocation of new shares, but that would have required you investing another R4m or so. 

Now, your holding in the company would still be around 0.4%, but you’d have had to more than double the initial cost of your investment.

So, an investor is between a rock and a hard place: either you pay up or you get less. Neither is great, but then it boils down to the why of a rights issue.

I’ve had two rights issues in recent years on shares I hold. Woolworths* raised money for its David Jones deal, which in hindsight has been a disaster of a transaction. 

I followed my rights and did not get diluted, but the current share price is below the take-up price for the rights issue and the business is struggling.

The other was issued by Discovery* a few years ago. Here I again paid up to follow my rights. The share price has finally started moving and I am well in the money.

So perhaps the lesson is simple. If the rights issue is to “save” the company as we’re seeing with Taste, it is often best left alone and to rather take the dilution (or, even better, consider exiting the share). 

But if it is to grow a solid and strong company, maybe it’s worth adding to the investment, but that is still not without risk, as the Woolworths example demonstrates.

The bottom line is that you shouldn’t just shrug off a rights issue; it has an impact, even for a smaller investor. 

*The writer owns shares in Woolworths and Discovery.

This article originally appeared in the 30 November edition of finweek. Buy and download the magazine here.

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