Need something Stock Markety Explaining

Shelster · 19 Apr 2014 at 11:55

At work we have an Employees Share Scheme to which I am subscribed and they purchase shares on my behalf each month.

As the company is now in a take over of another company for which they need to raise a fairly large lump of capitol, they have done a 'Rights Issue' to which I have three responses.

1. Sell Sufficient
2. Sell All
3. Buy All

The 'explanation' sheet that came with the offer would not win any awards with the Clear English Society....it is as clear as mud as to what each option means.

I can kind of understand the last one, which means I personally pay the money for my allocated shares and they come through as a separate holding to my Scheme shares.

Am guessing that the second one means that I sell all that I have been allocated and then get the cash in the post (plus pay NI and tax on it)

With the first option, do the holding company sell my Rights shares and then use the funds from this to buy ordinary shares at market value and than add this to my scheme shares?

Just trying to work out if option 1 or 3 will be the better one to go for.....

thepharcyde · 19 Apr 2014 at 13:51

Without knowing the issuer / prospectus would be anyones guess.

Phantom Shadow · 19 Apr 2014 at 14:14

You aren't buying 'rights shares'. You simply have a right to buy x number of ordinary shares at £x. Generally your option with this is to either exercise your right and buy the shares, or sell your rights to someone else so they can buy shares (or ignore the rights if you so wish). Not sure if you'd need to pay NI if you sell the rights, it counts as part disposal of your shareholding though I don't know whether this would come under the share scheme (so it may be taxed) or whether it would count as being separate to the scheme, in which case it would only be CGT you'd need to think about.

No idea what sell sufficient means.

Shelster · 19 Apr 2014 at 16:15

Shares are for Babcock and it is being run by Capita.

With what I hold, have the option for 21 New Ordinary Shares at price of £7.90 per share.

From the info sheet.....

Your Choice on the Rights Issue

As a holder of Existing Ordinary Shares in the Plan, you are entitled to take part in the Rights Issue. These are the three choices open to you

1 - SELL SUFFICIENT. You can instruct us to sell sufficient of your Rights to be able to use the net proceeds to subscribe for the rest of your Rights. You will then receive New Ordinary Shares. This will not require you to provide any funding and commission costs are to be met by the company.

2 - SELL ALL. You can instruct us to sell ALL the Rights allocated to you. Commission will be met by the company and net proceeds will be paid via payroll (inuring any NI and PAYE as standard.

3 - BUY ALL - You can instruct us to buy ALL the Rights to allocated to you and subscribe for all the New Ordinary Shares to which you are entitled. You will need to pay the full subscription price payable

.

As you can tell, I know Bo Diddly about Stock and Shares, so need it explaining in simplest GD terms and also am wondering which is the best option to take finances wise. Am tempted for Option 3 as for the outlay of £165.90 I am getting £255.00 worth of shares (at current prices)

Nzyme · 19 Apr 2014 at 17:18

Option 1 means you will get some shares but not all those you have a right to buy but it won't cost you anything.

Option 2 you will get no shares but get some cash

Option 3 you get all the shares you have rights to but will need to put up the cash.

As the issue will be at a price below market price the right to buy therefore has a value compared to buying in the market. This is what drives options 1 and 2.

Shelster · 19 Apr 2014 at 17:33

Nzyme said:
Option 1 means you will get some shares but not all those you have a right to buy but it won't cost you anything.

Option 2 you will get no shares but get some cash

Option 3 you get all the shares you have rights to but will need to put up the cash.

As the issue will be at a price below market price the right to buy therefore has a value compared to buying in the market. This is what drives options 1 and 2.

Many thanks for the explanation.....

If I went for option 2, would the shares from that be sold at Market Price, or the reduced offer price?

Am more and more leaning to Option 3 out of this...may have a chat with Mrs S about it, see what she thinks.

Just wondering how many shares I would end up with if I went with Option 1? Is tempting that one too as basically get more shares into the Plan, but no outlay on my part, but won't be getting the 21 that I have the Rights for.....oh the decisions. I thought this would be easy.....

thepharcyde · 19 Apr 2014 at 17:47

****CAVEAT THIS IS NOT ADVICE OR MAY NOT BE 100% CORRECT, THIS IS JUST MY OWN INTERPRETATION, I WILL NOT BE LIABLE FOR ANY FINANCIAL CONSEQUENCES OR INCONSISTENCIES/ERRORS WITH THE BELOW.****

My advise is that you speak with your HR/Payroll dept and or Capita the registrar for the shares or a financial advisor.

Essentially the options open to you appear to be an extension of the rights issue as an employee of said company.

However from looking at the prospectus issued below my understanding (NOT NECESSARILY CORRECT AS FOLLOWS) is

http://270314.babcockinternational.com/

Rghts issue

1) What is a rights issue?
Company looking to raise capital e.g. for a takeover (as in this case), future development e.g. purchasing in with the aim to expand/grow the business.

2) Why a rights issue?
As above, the new shares are often issued at discount vs if you were to purchase the shares in the open market.
Current shareprice for Babcock £12.60
Rights issue as you have seen is £7.90 for each new share subscribed (right exercised)

3) Options for holders of the rights
All existing shareholders will receive the 'Nil Paid Rights' for which they can either exercise (take up) and purchase additional shares subject to proration should it be oversubscribed (note the Babcock is only looking to raise £x amount hence offering 139,259,204 new shares) in the event of an oversubscription this maybe subject to proration. In which case you may not get your expected shares but scale back would apply to all subscribers.

Pursuant to the above the proposed takeover secondary to the rights issue (money being raised to purchase Avincis) would need to go wholly unconditional in respect to existing shareholders agreeing to the takeover and approval by the securities and exchange commission.

Anyway back to your options my understanding is as follows:

1 - SELL SUFFICIENT. Your rights will be sold and the proceeds of which will be used to purchase additional shares.

2 - SELL ALL. Your rights will be sold in the market and you will receive the cash net of taxes etc (whereby another investor on the secondary market will purchase them so that they can exercise and buy new shares).

3 - BUY ALL - You exercise your rights and pay the subscription cost of £7.90 per share and receive new shares.

thepharcyde · 19 Apr 2014 at 17:57

Shelster said:
Just wondering how many shares I would end up with if I went with Option 1? Is tempting that one too as basically get more shares into the Plan, but no outlay on my part, but won't be getting the 21 that I have the Rights for.....oh the decisions. I thought this would be easy.....

Depends when/if your rights are sold for in the open market. The rights were admitted to the stock exchange on Thursday.

Shelster · 19 Apr 2014 at 17:57

After discussing with Mrs S, looks like I will be going for Option 1.

So my understanding is that Capita will sell my 21 Rights and then use the proceeds of that to buy shares to go into my Plan, but I won't be getting 21 shares from it.

Just wonder at what rate Capita will sell them at.....will it be at the £7.90 or at current market price?

thepharcyde · 19 Apr 2014 at 19:16

This is covered in the below section of the prospectus, why not just read it?

I cannot see a current market price for the ISIN for the rights that are trading until the 11am 6th May 2014.

Dependent on how much your rights sell for will then divisible by £7.90 that will then equate your new share allocation, providing that they sell/sell in full. There is not always a market for rights.

I understand that there is a period when there is trading in the Nil Paid Rights. What does this mean?
If you do not want to subscribe for the New Ordinary Shares being offered to you under the Rights Issue and you are a Qualifying Shareholder, you can (provided that, subject to certain exceptions, you are not located or resident in the United States or any of the Excluded Territories) instead sell or transfer your
- 70 -
Nil Paid Rights and receive the net proceeds of the sale or transfer in cash. This is referred to as dealing “nil paid”. During the nil paid trading period (between 8.00 a.m. on 17 April 2014 and 11.00 a.m. on 6 May 2014), subject to demand and market conditions, persons can buy and sell the Nil Paid Rights. Please note that your ability to sell your rights is dependent on demand for such rights and that the price of the Nil Paid Rights may fluctuate.
If you wish to sell or transfer all or some of your Nil Paid Rights and you hold your Ordinary Shares in certificated form, you will need to complete Form X, the form of renunciation, on page 4 of the Provisional Allotment Letter and send it to the stockbroker, bank or other agent through or by whom the sale or transfer was effected, to be forwarded to the purchaser or transferee.
If you buy Nil Paid Rights, you are buying an entitlement to take up the New Ordinary Shares, subject to your paying for them in accordance with the terms of the Rights Issue. Any seller of Nil Paid Rights who holds his Ordinary Shares in certificated form will need to forward to you his Provisional Allotment Letter (with Form X completed) for you to complete and return, with your cheque, by 11.00 a.m. on 6 May 2014, in accordance with the instructions in the Provisional Allotment Letter.
If you are a CREST member or CREST sponsored member and have received a Provisional Allotment Letter and you wish to hold your Nil Paid Rights in uncertificated form in CREST, then you should send the Provisional Allotment Letter with Form X and the CREST Deposit Form on page 4 of the Provisional Allotment Letter completed (in the case of a CREST member) to the CREST courier and sorting service or (in the case of a CREST sponsored member) to your CREST sponsor by 3.00 p.m. on 30 April 2014 at the latest.
Qualifying CREST Shareholders and, subject to dematerialisation of their Nil Paid Rights as set out in the Provisional Allotment Letter, Qualifying non-CREST Shareholder who are CREST members or CREST sponsored members can transfer Nil Paid Rights, in whole or in part, by means of CREST in the same manner as any other security that is admitted to CREST. Please consult your CREST sponsor or stockbroker, bank or other appropriate financial adviser, or whoever arranged your share purchase, for details.

Efour · 19 Apr 2014 at 19:28

buy low
sell high
Profit

thepharcyde · 19 Apr 2014 at 19:39

Efour said:
buy low
sell high
Profit

It works the other way around too

Phantom Shadow · 19 Apr 2014 at 19:55

Shelster said:
Am tempted for Option 3 as for the outlay of £165.90 I am getting £255.00 worth of shares (at current prices)

The share price will fall as a result of a share issue, so you won't be getting £255 worth of shares. It should work out as such that if you exercise your share rights then the value of your shareholding would be effectively unchanged. If you take a weighted average of the value of your existing shares and how much you're paying for the new shares, the market value of your shares should roughly equal this.

Of course it won't work out like that as this is the real world not a theoretical example, that's where the speculation comes in as everyone tries to make some money.