Page 22 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

(b) For funding expansion projects, a company may make a rights issue. Notes
(c) If a company has a proportion of interest-bearing loan capital, it can suffer from a
squeeze on profits. The company can improve its capital structure position by
obtaining extra share capital.
(d) At a time when the share prices were relatively high, companies found it easy to
persuade their shareholders to subscribe cash for new issues with a view to expansion
by takeover.
Advantages of Rights Issue

To Companies: The company benefits from lower issue costs, in that administration and
underwriting costs are lower and the issue is made at the discretion of the directors rather
than via a general meeting of the company. This is because issues of equity through the
stock exchange will alter the balance of ownership.
To the shareholders: The main attraction of the rights issue for current shareholders is that
they are able to maintain their original proportion of share ownership. Furthermore, any
transfer of wealth away from them due to an equity issue being under-priced, is avoided.

In order to make a rights issue the company, when making the offer, must detail the
reasons for the issue, the terms of the offer, the capital structure of the company at the time
of issue, the future prospects for the company, and forecasts of future dividends. The Board
of Directors sets the number of shares needed to be bought under the pre-emptive right by
the existing shareholders in proportion to their existing shares held. The ratio is determined
using a simple calculation.

Number of outstanding shares
N =
Number of new shares to be offered
Where, N = Number of rights needed to buy one new share
Long-dated Rights

The long-dated rights are a dilutive anti-takeover device in which rights are automatically
distributed to existing stockholders during hostile takeover. These 'poison pills' are
automatically exercised when during a hostile takeover, a company or an investor acquires
a certain percentage of shares, thereby diluting the takeover.

Case Study TOUAX Success of Rights Issue

OUAX is a French company and is currently Europe's no. 1 in shipping containers
and river barges, and no. 2 in modular buildings and freight railcars. The Group
Tprovides operating leases to customers around the world, both on its own account
and for third-party investors.
On June 24, 2009, TOUAX announced that its capital increased by waiving preferential
subscription rights but with priority for existing shareholders, launched on 18 th June
2009 for a total of E17,851,519.76 (gross) through the issue of 936,596 new shares which
were subscribed in the entirety. Following partial application of the extension clause,
952,747 shares were placed or 101.72% of the issue; total proceeds were E18,159,357.82.

Contd...

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