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A company life map - the rise and fall of a hot stock

Introduction| Course| 619

11. Rights issue

In late 1998, Country Bumpkin wants to raise more capital for its expansion plans. It has had a good debut as a public company, and its investors have seen their shareholdings rise in value. It decides to tap them for more capital by having a rights issue.

The rights issue is a "1 for 7" at 250p. In other words, for every 7 shares that they hold, shareholders can buy 1 more at 250p each, compared with a current share price of 300p.

Since there are 14 million shares in issue, if all the shareholders take up their rights, the company will issue 2 million new shares and raise £5 million.

The company has the rights issue underwritten by a merchant bank, and the bank arranges for institutions and some private clients to agree to buy any shares not subscribed for by existing Country Bumpkin shareholders. In return the bank is paid an underwriting fee.

• As the owner of 1,000 shares, the rights issue gives you the right to buy 142 new shares at 250p each.
• You could decide to sell the entitlement to the rights issue itself. This has a value because the subscription price, 250p, is lower than the current trading price, 300p. There is a built-in profit on your 142 shares of over £70 (unless the current price drops).
• But you decide to take up the rights, and send off your cheque for £355. You now have 1142 shares in Country Bumpkin.
• The company as a whole now has 16 million shares in issue, up from 14 million. It has also put another £7 million in the bank to fuel growth.

1. Country Bumpkin - the early days 2. The decision to go public 3. AIM flotation by a placing of new shares 4. AIM flotation by an offer for sale 5. AIM flotation by tender offer 6. AIM flotation by introduction 7. First day of public trading on AIM 8. A growth strategy 9. End of lock-in period 10. The acquisition trail 11. Rights issue 12. Scrip issue 13. Preliminary results announced 14. Full results announced 15. Rumours of a deal - clarifying announcement 16. Takeover of rival - cash and shares deal 17. Convertible loan stock 18. Preparation for the main market 19. Admission to the main market 20. Move into FTSE 250 21. Share split 22. Share buyback 23. Director sells shares 24. New York-led collapse of tech stocks 25. Suspension of shares 26. Hostile bid for Country Bumpkin 27. Liquidation

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