The Dutch Job: Royal Imtech (NL0006055329) Deeply discounted rights issue – The “short opportunity of the century”

I had written about Royal Imtech, the troubled Dutch service company already a couple of times. The short story: Growth star encounters fraud and too much debt.

Somehow, I lost them from my radar screen until today. Already in August, they announced that they will do another rights issue, this time aiming for 600 mn EUR, after having raised 500 mn in 2013.

The funny thing is the way they actually do this which even puts my favourite “Italian Job” companies at shame:

Following the approval granted by the General Meeting on 7 October 2014, Royal Imtech N.V. (“Royal Imtech” or the “Company”) announces a 131 for 1 fully underwritten rights offering of 60,082,154,924 new ordinary shares with a nominal value of EUR 0.01 each (the “Offer Shares”) at an issue price of EUR 0.01 per Offer Share (the “Issue Price”). For this purpose, and subject to applicable securities laws and the terms of the prospectus dated 8 October 2014 (the “Prospectus”), existing holders of ordinary shares in the share capital of Royal Imtech (“Ordinary Shares”) as at 17:40 CEST on 8 October 2014 (the “Record Date”) are being granted transferable subscription rights (“Rights”) pro rata to their existing shareholdings (the “Rights Offering”, and together with the Rump Offering (as defined below) the “Offering”). No Rights will be granted to Royal Imtech as a holder of Ordinary Shares in its own capital. The Rights will entitle the holders thereof, provided they are Eligible Persons, to subscribe for 131 Offer Shares for every Right held at the Issue Price, subject to applicable securities laws and in accordance with the terms and subject to the conditions set out in the Prospectus. The Issue Price per Offer Share represents a discount of approximately 21.7% to the theoretical ex-rights price (“TERP”) based on the share price of EUR 0.3763 at Euronext in Amsterdam (“Euronext Amsterdam”) after close of business on 7 October 2014 and 458,642,404 shares issued and outstanding at the same date (thus excluding treasury shares

So before the rights issue, the market value of the company was around 0,38*458 mn shares= 175 mn EUR. Today is the first day where Royal Imtech trades “ex rights”. Just as a little refresher the formula for calculating the value of the right (to buy 131 shares at 0,01 EUR) before trading:

(0,3763-0,01)*131/132= 0,3635

So theoretically the price of Royal Imtech should be today: 0.3763-0.3635 = 0,0128 EUR. a little more than one cent.

Let’s look what the shareprice is doing today:

Imtech is trading at 0,09 EUR, around 800% higher where it should trade !!!!! On the other hand, the rights trade only at 0,17 EUR at the time of writing, a discount of 50% to the theoretical value (as of yesterday).

This leaves the question: Why are investors paying today 9 cents for the shares which they can buy via the rights at a little over 1 cents per share in 2 weeks time ? I have no answer. MAybe people (and computers) mixed up the decimals and think the new shares come at 0,10 EUR ?

Anyway, if anyone is able to short Royal Imtech at this level, this would be the short of the century. You can short something at 0,09 EUR today and buy back at 0,01 in a few days. Nothing more to say….

Edit: Might be a good example for any student who is confronted with the “Efficienty markets hypothesis”.

19 comments

  • You were right, Imtech shares are not worth more than 1ct (or 5 EUR after the reverse split today).
    However, if you look at the intraday chart from last week, the arbitrageurs could have made a nice profit. The shares were trading above 0.012 EUR at early trading on Thursday (the first day professionals could sell). Depending on the price you paid for the rights that’s a quick 10% gain. Not bad.

  • Thats correct , Shs can’t be borrowed. Problem is if everybody wants to buy the rights for exercise and short them straight away you have a potential 60 bio shs to be shorted while current float is 458 mio shs. Our pool is completely empty fully lent out and no settled positions left 😉

  • I don’t think you can be short of the stock : there aren’t enough in the market, your broker/clearer will recall you and you will be forced to buy them back (since you can’t borrow them)
    -> might explain why it went so up (the first sellers had to buy them back)

    It leaves one question, who wants to buy this since the arbitrage is being short…

  • Adrián Santos

    Hi, I can think of a case exactly like this one, bankia, the Spanish bank.
    Could any of you short this? Is there any chance the short could go wrong?

  • Thanks for this write up. Interesting move, perhaps shorts covering to .2 in morning. Another run for the shorts tomorrow?

    There’s a price for everything…Or is Imtech going bankrupt anyway?

  • this happens all the time in small floats where there is no locate

  • At some point today the company was worth almost €15bn. (!)
    Too bad I couldn’t find any broker who would allow shorting it, even with CFDs.

  • “You can short something at 0,09 EUR today and buy back at 0,01 in a few days. Nothing more to say….”

    you can short it for .15 now but its not really true that you can buy it back at 0,01. In order to buy it back at 0,01 you will have to have the rights that they now trade at 0.16.
    So what i think will happen is that the rights will eventually trade at the share price -1c.

  • asking questions

    There is very little trading going on and it is impossible to borrow the shares in order to go short?

    • already 200 mn shares have been traded today….. almost half of all existing shares.

      • Maybe that’s just €5000 worth of shares that a couple of algos are fighting over all day. Capital action or news are usually good for intra day algos (and euronext seems quite algo friendly) maybe they just overwhelmed the few remaining human traders today on this one. Seems plausible from a look at the tape (lots of tiny trades in quick bursts).

        As for the efficient markets hypothesis, in its more relaxed form it just says there’s no easy pickings which is the case here because it’s unshortable, so no major violation.

  • I think the rights should trade around 10 euro: 131 times (0.09-0.01)

    • well, the “true price” of the rights is 0,36 EUR. The problem is taht you cannot arbitarge this and the shareprice will fall for sure until the end of the exercise period.

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