The Secret Broker: ‘Rights’ or wrong?
Link copied to
Recently, I have noticed a spate of rights issues popping up. A rights issue gives all shareholders the “right” to subscribe for new shares in their company at a set price based on how many shares they hold.
Unlike a placement where holders can be diluted down, a rights issue is designed so as no dilution occurs.
There are two types of rights issues: renounceable and non-renounceable.
A renounceable rights issue allows the rights being offered to be on sold or transferred to third parties, whereas the rights to a non-renounceable issue cannot be sold or transferred on.
Also, rights issues can be underwritten and if a shareholder does not take up their rights it means they have let them lapse.
An underwriter will, for a fee of around 6 per cent, guarantee to take up any rights that shareholders have let lapse.
You should also note that, if an underwriter also happens to be a large shareholder and the rights issue is not that popular with the other shareholders, their underwritten guarantee allows them to legally increase their holding above 19.9 per cent, without the need to make a full bid for the company.
This trick has been used a few times, though a reversal of this almost caused a riot at Rio Tinto (ASX:RIO), before major shareholders forced the company to change tack.
I mention all of this because of a current rights issue which was drawn to my attention via a tweet, where an ASX company is currently offering shareholders a non-underwritten 2 for 3 non-renounceable rights issue at 0.001 cent per share.
What really caught my attention was not the fact that the company is potentially issuing 900 million shares to try and raise $900,000, or the fact that the issue price is at the lowest price ever allowed on the ASX, or even the fact if not taken up, the dilution on shareholders is potentially 43 per cent, no, no, no.
It was the company’s name.
I could only surmise that Wayne’s mother was a fan of Johnny Cash and his song A Boy Named Sue, so he would be toughened up for the corporate world.
When I saw that the company trying to force almost 1 billion shares at 0.001 cent down their long-suffering shareholders throats was an ASX-listed company called ShareRoot, I thought well that’s up there.
Then I read about its recent failed attempt at a 30 to 1 share consolidation and thought that if this rights issue bellyflops, then maybe shareholders may demand that an “ed” is inserted somewhere.
Talking of something that definitely did have an “ed” inserted, it is 20 years ago this week that Nick Leeson, was released from jail.
Leeson managed single handily to add an “ed” to the name of Barings Bank, via a few derivative contracts which went a bit haywire and led him to lose £800m ($1.4bn) on his £5m trading limit account.
Leeson will go down in trading history, as the guy you wished was on the other side of your trading account. #nomoreporridge
The Secret Broker can be found on Twitter here @SecretBrokerAU. Feel free to contact him with your best stock tips and ideas.