Understanding Rights Issue and Private Placement in Stock Market Financing

Rights Issue Explained: A Shareholder's Advantage

When a company decides to issue shares to raise capital, one method it may use is a rights issue. This approach offers existing shareholders the privilege to purchase new shares before the general public. The rights issue is a testament to shareholder loyalty, providing them with an opportunity to increase their investment at a potentially lower price than the current market value.

The Mechanics of a Rights Issue

Imagine a company, Ivanhoe Mines, which needs $1.2 billion in new equity. With their shares valued at $24.73 in the market, they propose a rights issue allowing shareholders to buy three new shares for every twenty they own at a discounted price of $13.93 each. This incentivizes shareholders to participate since they can acquire additional shares below market price, hence potentially increasing their investment's value.

Calculating the Value of Rights

• Current market value per share: $24.73
• Offer: Buy 3 new shares at $13.93 for every 20 owned
• Current value for 20 shares: $494.60
• Cost to acquire 3 new shares: $41.79
• New total after acquisition: 23 shares
• New share price: $23.32

The rights value comes out to be $9.39 per share, reflecting the benefit to the shareholder for participating in the rights issue.

Case Study: Lof Corporation's Rights Offer

In a similar scenario, Lof Corporation needs to raise $1.28 billion. With shares at $60 each, they offer shareholders the right to purchase four new shares at $41 per share for every seventeen shares they own.

• Current value of 17 shares: $1,020
• Cost for 4 new shares: $164
• New total: 21 shares
• New share price: $56.38

The value of each right in this instance is $15.38, again demonstrating the financial advantage of participating in the rights issue.

Private Placement: A Closer Look

What is Private Placement?

Unlike public offerings, a private placement involves selling shares to a select group of investors, often large institutional investors, without the need to register with the Securities and Exchange Commission (SEC). This method saves on registration costs and reduces the time needed to issue the securities.

Advantages and Drawbacks

• Advantages:

  • Avoids SEC registration
  • Faster issue process
  • Can be tailored to specific investors

• Drawbacks:

  • Less liquidity for investors
  • Potentially less market exposure

Institutions like life insurance companies often partake in private placements, valuing long-term investment and being less concerned about immediate marketability.

Private placements have fostered an active market, particularly for corporate debt, thanks to these institutions' investment strategies.

Conclusion

Both rights issues and private placements offer unique benefits and considerations for companies looking to raise capital. Shareholders have the opportunity to benefit from rights issues, while private placements offer a streamlined, less public approach to financing.

For a more detailed explanation and examples, watch the full discussion on YouTube here.

If you have any questions or need further clarification on these topics, please reach out, and thank you for following along with this financial insight.