- Fully paid-up new ordinary shares issued free to existing shareholders in proportion to their current stock/shareholdings.
- It capitalizes a part of distributable reserve in retained earnings to bring
- share capital more in line with the assets employed
- a high share price back to a more manageable amount, thus seemingly enhancing its marketability.
- The number of shares held by each shareholder increases, the value of the total shareholding remains the same as before the bonus issue.
- Shares being offered to existing shareholders at a discount to the current trading price, for the purpose of raising funds for the company.
- The raised capital can be used to acquire assets, make a take-over, repay debts or save themselves from bankruptcies.
- It can be issued by companies with healthy balance sheets in order to fund research and development projects or to purchase new companies.
- The raised capital can further strengthen the company’s balance sheet and allow it to pursue strategic opportunities in core markets
!!! Bonus and Rights issue will cause a company’s net profit to spread over a larger number of shares. In other words, a company’s earnings per share will decrease as earnings allocated to each ordinary share an investor has invested in will be diluted.
Warrants
- A long-term instruments that also allow shareholders to purchase additional shares of stock
- They are typically issued with an exercise price above the current market price
- It provide opportunity for shareholders to convert the warrants to ordinary shares within a fixed period of time up to 10 years.
- It usually offered in conjunction with right issues and act as a “sweetener” in Bursa.
- Share traded on “cum” basis - after the announcement on the Bonus and Rights Issue, and free warrant. The investors who purchased the share will be eligible to receive the Bonus Shares and subscribe to the Right Shares as declared by the company.
- Share traded on “ex” basis - an investor who purchases the shares will no longer be eligible to receive the Bonus, right Shares and Warrants as declared by the company.
- Rights are often renounceable and investors can sell off the Rights after the ex-date for a period of about 1-2 weeks before expiry of the Rights.
- Bonus Issue - e.g. X bonus for Y shares held, adjustment price = (Y x Share Price)/(X + Y)
- Rights Issue - e.g. X right for Y shares held, Right Issue at RMZ, adjustment price = (X x Z) + (Y x Share Price)/(X + Y)
- RPS will not affect the adjusted price after the exercise as it is not convertible to ordinary share.
- Generic Formula
- Adjusted Price, Pa= (P*Y+X*Y*Z+W*X*Y*K)/(Y+X*Y+Y*B+X*Y*W)………(1)
- The warrants are assumed to be converted at the conversion price K - he warrant adjustment may have to be based on an option pricing model (OPM). That would be quite complicated and I think we shouldn’t go there yet.
Price Adjustment Example - KEURO
Renounceable rights issue of 429,743,823 new ordinary shares of RM1.00 each in Kumpulan Europlus Berhad (“KEB”) (“KEB Shares”) (“Rights Shares”) at an issue price of RM1.08 per Rights Share, together with 214,871,911 free detachable warrants (“Warrant(s)”), on the basis of three (3) Rights Shares for every four (4) existing KEB Shares held as at 5.00 p.m. on 5 August 2014 (“Entitlement Date”) and one (1) free Warrant for every two (2) Rights Shares subscribed for (“Rights Issue with Warrants”).
KEuro closed at a cum price of RM1.31 on 31/7/14 just before the ex-date.
Example you have 10,000 (Y) shares of KEuro just before the ex-date
Ratio
|
New shares
|
|||||||||
Bonus ratio, B
|
0
|
new for
|
1
|
existing
|
0
|
0
|
||||
Rights ratio, X
|
3
|
new for
|
4
|
existing
|
0.75
|
7500
|
||||
Warrant ratio, W
|
2
|
new for
|
1
|
Rights
|
0.5
|
3750
|
||||
P
|
Cum Price
|
|||||||||
Z
|
Subscription price of Rights
|
|||||||||
K
|
Warrant conversion price
|
|||||||||
Y
|
10000
|
P
|
1.31
|
Z
|
1.08
|
K
|
1.18
|
Pa= (P*Y+X*Y*Z+W*X*Y*K)/(Y+X*Y+Y*B+X*Y*W)
= (1.31*10000 + 0.75*10000*1.08 + 0.5*0.75*10000*1.18) / (10000 + 0.75*10000 + 10000*0 + 0.75*10000*0.5)
= 1.205
Value of Rights, R = Ex Price - Subscrition Price = Pa - Z = 1.205 - 1.08 = 0.125
Value of each OR = X * 0.125 = 0.09
!! Note: In actual case, nobody will forego the time value of warrants by conversion like that. The warrant price to be much higher than that.
"It appears that corporate exercise like a bonus issue creates value which is contrary to the principle of fundamental finance, doesn’t it? In my opinion, nothing can be created from the sky. In many cases investors chased the share price up sky high due to the exercise but eventually the share price reverted to the mean and many investors lost big time as a result. In Pintaras case it was the unlocking of the value as a result of the exercise and the vast improvement of its fundamentals recently which triggered its rerating, with the bonus issues acting just as a catalyst." - kcchongnz
References:-
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