Tag Archives: Deeply discounted rights issues

A quick look at the Unicredit (deeply discounted) rights issue

The rights issue

Those who have been reading the blog long enough might remember that Italy in general is a good hunting ground for “interesting” deeply discounted rights issues and especially Unicredit rights issues in the past were very interesting experiences.

So roughly 4 years later, Unicredit has launched another rights issue. Ex date for the subscription right has been Monday, February 6th.

The conditions were as follows:

  • 13 new shares for 5 existing ones
  • a subscription price of 8,09 EUR
  • total volume 13 bn EUR (!!!)
  • subscription rights trade under the ticker UCGAZ

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Groundhog day: Another BMPS (ISIN IT0005092165) deeply discounted rights issue “Italian style”

Health warning: Do not try to trade in such situations unless you know exactly what you are doing. This is not investment advise, do your own research.

Almost exactly 1 year ago, I already looked at last year’s deeply discounted rights issue of struggling Italian Bank BMPS. Well, the same time in the year again and of course, BMPS is again in the market…. somehow this reminds me of this great movie:
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Banca Monte dei Paschi Siena (BMPS)- Another deeply discounted rights issue “Italo style”

Capital Raising in Italy is always worth looking into. Not always as an investment, but almost always in order to see interesting and unusal things. I didn’t have BMPS on my active radar screen, but reader Benny_m pointed out this interesting situation.

Banca Monte dei Paschi Siena, the over 600 year old Italian bank has been in trouble for quite some time. After receiving a government bailout, they were forced to do a large capital increase which they priced in the beginning of last week.

The big problem was that they have to issue 5 bn EUR based on a market cap of around 2,9 bn.

After a reverse 1:10 share split in April, BMPS shares traded at around 25 EUR before the announcement. In true “Italian job” style, BMPS did a subscription rights issue with 214 new shares per 5 old shares at 1 EUR per share, in theory a discount of more than 95%.

The intention here was relatively clear: The large discount should lead to a “valuable” subscription right which should prevent the market from just letting the subscription right expire. What one often sees, such as in the Unicredit case is the following:

– the old investors sell partly already before the capital increase in order to raise some cash for the new shares
– within the subscription right trading period, there will be pressure on the subscription right price as many investors will try to do a “operation blanche”, meaning seling enough subscription rights to fund the exercise of the remaininng rights. This often results in a certain discount for the subscription rights

In BMPS’s case, the first strange thing ist the price of the underlying stock:

BMPS IM Equity (Banca Monte dei  2014-06-16 13-51-34

Adjusted for the subscription right, the stock gained more than 20% since the start of the subscription right trading period and it didn’t drop before, quite in contrast, the stock is up ~80% YTD. As a result of course, the subscription right should increase in value. But this is how the subscription rights have performed since they started trading:

MPSAXA IM Equity (Banca Monte de 2014-06-16 13-59-10

It is not unusual that the subscription rights trade at a certain discount, as the “arbitrage deal”, shorting stocks and going long the subscription right is not always easy to implement.

At the current price however, the discount is enormous::

At 1,95 EUR per share, the subscription right should be worth (214/5)* (1,95-1,00)= 40,66 EUR against the current price of 18 EUR, a discount of more than 50%. The most I have seen so far was 10-15%. So is this the best arbitrage situation of the century ?

Not so fast.

First, it seems not to be possible to short the shares, at least not for retail investors. Secondly, different to other subscription right situations, the subscription right are trading extremely liquid. Since the start of trading on June 9th, around 560 mn EUR in subscription rights have been traded, roughly twice the value of the ordinary shares. The trading in the ordinary shares themselves however is also intersting, trading volume since June 9th has been higher than the market cap.

Thirdly, for a retail investors, the banks ususally require a very early notice of exercise. So one cannot wait until the trading period and decide if to exercise or not, some banks require 1 week advance notice or more. My own bank, Consors told me that I would need to advice them until June 19th 10 AM, which is pretty OK but prevents me from buying on the last day.

In general, in such a situation like this the question would be: What is the mispriced asset, the subscription right or the shares themselves ? Coming from the subscription right perspective, the implicit share price would be 1+ (18/((214/5)*1,95-1)))= 1,44 EUR. This is roughly where BMPS traded a week before the capital increase.

For me it is pretty hard to say which is now the “fair” price, the traded stock price at 1,95, the implict price from the rights at 1,44 or somewhere in between. As the rights almost always trade at a discount, even in non-Italian cases, one could argue that there might be some 10-15% upside in buying the shares via the rights. On the other hand, I find the Italian stock market rather overheated at the moment and the outstanding BMPS shares are quite easy to manipulate higher due to the low market cap of the “rump shares” at around 200-250 mn EUR.

The “sure thing” would be to short the Stock at 1,96 EUR, but that doens’t seem to be possible.

Summary:

Again, this “Italian right” capital raising creates a unique situation, this time with a price for the subscription right totally disconnected from the share price.

Nevertheless I am not quite sure at the moment what to to with this. One strategy would be to buy the subscription right now and then sell the new shares as quickly as possible, but it looks like that this is exactly what the “masterminds” behind this deal have actually want investors to do. They don’t care about the share price, they just want to bring in 5 bn EUR in fresh money and an ultra cheap subscription right is the best way to ensure an exercise. In this case we should expect a significant drop in the share price once the new shares become tradable. So for the time being am sitting on the sidelines and watch this with (great) interest as it is hard for me to “handicap” this special situation at the moment.

Quick update KPN – Sold rights & stock

Today I sold, both the KPN Shares and the rights .

All in all, I got around 2,91 EUR (1.68 for the shares, 1.23 EUR for the rights) which results in a gain of ~ 11.5% before trading cost. Quite a nice outperformance against the AEX with ~ 3.5% in the same time period.

Nevertheless, this was clearly a “bumpy ride” as the chart for the rights shows:

The optimal timing would have been to buy on the second day of the trading period. I guess this was the result of the very short time period between announcement of the terms and the start of trading.

I heard that for instance US investors were completely taken by suprise and couldn’t actively trade the rights.

Main reason for selling was that I was not sure if I want to exercise the rights and I have some other, in my opinion better ideas in the pipeline. Also I am not really optimistic about KPN in the long term.

In general, those “deeply discounted rights issues” are interesting special situations for a short term trade but have to be handled with a lot of care and patience …

Edit:
Someone asked me why I don’t show annualized returns for my single portfolio stocks. In my opinion, annualized returns for single stocks are pretty meaningless. The KPN Trade would have been an annualised 280% but what does such a number say ? As my investment strategy includes a lot of “sleeping” stocks, I think that showing annualized returns on single stock level do not provide any benefit at least not for me. Much more interesting than an annualized return per stock is the potential gap between the current price and intrinsic value.

KPN rights issue: Final terms

I have covered KPN as a potential “deeply discounted risghts issue” special situation in the past.

Today, KPN announced the final terms for their rights issue (bold marks mine):

2 for 1 rights issue of 2,838,732,182 new ordinary shares at an issue price of EUR 1.06 for each ordinary share
• Issue price represents a 35.1% discount to the theoretical ex-rights price, based on the closing price of KPN’s ordinary shares on NYSE Euronext in Amsterdam at 24 April 2013
AMX has committed to subscribe for the Rights pro rata to its current participation in the issued share capital (excluding treasury shares) of 29.77%
Record Date for Offering is set at 25 April 2013 at 5.40 pm CET
Exercise Period runs from 9.00 am CET on 26 April 2013 until 3.00 pm CET on 14 May 2013• Rump Offering (if any) is expected to take place on 15 May 2013

What I find very remarkable is that there is only a very short time period between announcement of the terms and the start of the trading of the rights. Basically they announced today and trading starts tomorrow.

For the portfolio, I will start with a 1% investment as a rather “short term” special situation based on current prices of around 2.61 EUR per share. Lets wait and see how that one works out.

Deeply disounted rights issue watchlist: Severfield-Rowen Plc (ISIN GB00B27YGJ97)

UK based Severfield-Rowen is according to Bloomberg

Severfield-Rowen plc is an engineering and construction company. The Company designs, fabricates and erects structural steelwork, specialist claddings, and ancillary products. The Company also manufactures and markets a range of equipment for the meat and poultry processing industry through the subsidiary Manabo Limited. Severfield-Rowen operates primarily in the United Kingdom.

S-R came out in November with a profit warning, estimating Pre Tax profits of ~ 1mn GPB

By James Amott
Nov. 5 (Bloomberg) — Pricing pressure, protracted contractual settlements posing significant challenges, co. says in statement.
• Performances of U.K. businesses mixed
• FY pretax profit likely to be ~GBP1m
• Co. confident revamp will improve performance

Then, a little bit like in the Imtech case, the news got worse in January:

By Nadine Skoczylas
Jan. 23 (Bloomberg) — Severfield-Rowen says U.K. performance, further, “and materially,” hurt by cost overruns on 122 Leadenhall contract.
• Board intends to review current contract base, will provide update to mkt as soon as possible
• “In light of these recent developments,” board concluded that change of leadership needed to “re-establish confidence” with stakeholders
• CEO Tom Haughey standing down, leaving board with immediate effect
• Chairman John Dodds will assume role of CEO until new chief found; board “actively engaged” in search

Of course, after the CEO departure some more issues were identified and again, similar to Imtech, a capital raising was more or less dictated by the banks.

Last week then, Severfield came out with the preliminary 2012 numbers (Loss of 18.2 mn GBP) and the details of a deeply discounted rights issue.

At a current market cap of 70 mn GBPs, Severfield wants to raise ~50 mn GBP. In order to guarantee success (and to please the underwriting banks), they will issue new shares under the following conditions:

– 7 new shares for 3 old ones
– issue price 0.23 GBP (against 0.79 current price), so a discount of almost 70% !!
– the “ex date” for the subscription rights is March 19th, trading of the subscription rights will happen from March 19th to April 4th

The value of one subscription right should be at current prices:

(0.79-0.23)/((3/7)+1)=0.39 per share/subscription right.

Clearly, shareholders are not big fans of large capital increases.

The shareholders are the “who is who” of UK fund managers, the biggest are:

Prudential 13.4%
M&G 12.7%
Jo Hambro 11.3%
Aviva 10.1%
Threadneedle 6.7%

Interestingly, US Small Cap value firm Royce had built up a 3.9% stake end of last year, I guess they are not that happy now.

The stock price has been punished quite severely over the last months:

One can also see the different stages of hope and despair, especially in the last few weeks. I haven’t looked too closely at the company yet, but in my Boss model, the stock doesn’t look that bad. Interestingly, if one looks at the balance sheet, one might think that debt should not be such a problem, although they do have pension liabilities as well.

So for the time being no action, but an interesting candidate for my “deeply discounted rights issue” research.

Royal Imtech update: Higher loss & Rights issue

After last qeek’s first look at Royal Imtech, Imtech came out today with a press release:

The highlights were as follows:

Rights issue will be completely used for debt reduction
Measures to make financial structure more robust
Write-off of 150 million euro for Polish projects
Write-off of 150 million euro for German projects

So this means that the write offs are a lot higher than initially communciated. Back then, they only said “100 mn EUR in Poland”, now we are at 300 mn EUR in Poland and Germany.

In parallel they also reported a change in the CEO positon:

Gouda, the Netherlands – The Supervisory Board of Royal Imtech N.V. (IM-AE, technical services provision within and outside Europe) confirms that in good consultation and in line with the original plan, René van der Bruggen (65) has decided to retire as of 3 April 2013. He will remain a member of the Board of Management until 3 April. He will hand over as Chairman with immediate effect. Gerard van de Aast (55), who is already a member of the Board of Management, is as of now appointed CEO of Royal Imtech and Chairman of the Board of Management

So this could be an interesiting situation. The new CEO will most likely go for a “kitchen sink” approach and write off as much as possible in order to have some “cushion” in the future.

Another aspect is what they say in the first press release:

Royal Imtech N.V. (IM-AE, technical services provider in and outside Europe) announces that the company will strengthen its equity through a rights issue of 500 million euro. The proceeds of the rights issue will be completely used for debt reduction. As a result of this the balance sheet of Imtech will be reinforced

This looks like that the banks have Imtech “by the balls” and could push through the rights issue in their interest. So it is not really a surprise that the share price of Imtech dropped to a new low:

Again, as in the KPN case I would wait until the details of the rights issue are known. With a current market cap of 800 mn EUR, a 500 mn EUR rights issue will require a significant discount.

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