Tag Archives: Unicredit

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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Underrated special situation – Deep-discounted rights issues

In many books which deal more or less explicitly with “special situation” investing, for instance Joel Greenblatt’s “You can be a stock market genius” or seth Klarman’s “Margin of safety”, many so-called “Corporate actions” are mentioned as interesting value investing opportunities.
Some of the most well know corporate actions which might yield good investment opportunities are:

– Spin offs
– tender offers /Mergers
– distressed / bankruptcy 

However one type of corporate action which is rarely mentioned are rights issues and especially “deeply discounted” rights issues.

Let us quickly look at how a rights issue is defined according to Wikipedia:

A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time.[1] In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

So we can break this down into 2 separate steps:

1. Existing shareholders get a “Right” to buy new shares at a specific price
2. However the shareholders do not have to subscribe the new shares. Instead they can simply choose to not subscribe or sell the subscription rights

Before we move on, Let’s look to the two alternative ways to raise equity without rights issues:

A) Direct Sale of new shares without rights issues
This is usually possible only up to a certain amount of the total equity. In Germany for instance a company can issue max. 10% of new equity without being forced to give rights to existing shareholders. In any case this has to be approved by the AGM.

B) (Deferred) Issuance of new shares via a Convertible bond
Many companies prefer convertible bonds to direct issues. I don’t know why but I guess it is less a stigma than new equity although new equity is only created when the share price is at or above the exercise price at maturity. So for the issuing company, it is more a cash raising exercise than an equity raising exercise. Usually, the same limits apply to convertible debt than for straight equity.

So if a company needs more new equity, the only other feasible alternative is a rights issue. But even within rights issues, one can usually distinguish between 3 different kinds of rights issues depending on the issue price:

1) “Normal” rights issue with a relatively small discount
Usually, a company will issue the new shares at a discount to the old shares in order to “Motivate” existing shareholders to take up the offer. If they do not participate, their ownership interest will be diluted. Usually “better” companies try to use smaller discounts, high discount would signal some sort of distress

2) Atypical rights issue with a premium
This is something one sees sometimes especially with distressed companies, where a strategic buyer is already lined up but wants to avoid paying a larger take over premium to existing shareholders

3) Finally the “deeply” discounted rights issue

Often, if a company does not have a majority shareholder, the amount of required capital is relatively high and there is some urgency, then companies offer the new shares at a very large discount to the previous share price.

But exactly why are “deeply discounted” rights issues an interesting special situation ?

After all this theory, lets move to an example I have already covered in the blog, the January 2012 rights issue of Unicredit In this case:

– Unicredit did not have a controlling shareholder. One of the major shareholders, the Lybian SWF even was not able to transact at that time
– the amount to be raised was huge (7.5 bn EUR)
– it was urgent as regulators made a lot of pressure

As discussed, in the case of Unicredit, before the actual issuance at the time of communication the stock price was around 6.50 EUR, the theoretical price of the subscription right was around 3.10 EUR. However even before the subscription right was issued, the stock fell by 50 %. At the worst day, one day before the subscription rights were actually split off, the share fell (including the right) almost down to the exercise price without any additional news on the first day of subscription right trading.

But why did this happen ? In my opinion there is an easy answer: Forced selling

Many of the initial Unicredit Investors did not want to participate or did not have the money to participate in the rights issue. As the subscription right was quite valuable, a simple “non-exercise” was not the answer. As history shows, selling the subscription right in the trading period always leads to a discount even against the underlying shares, in this case some investors thought it is more clever to sell the shares before, including the subscription rights. Sow what we saw is a big wave of unwilling or unable investors which wanted to avoid subscribing and paying for new shares which created an interesting “forced selling” special situation.

Summary: In my opinion, deeply discounted rights issues can create interesting “special situation” investment opportunities. Similar to Spin offs, not every discounted rights issue is a great investment, but some situations can indeed be interesting. On top of this, those situations often are not really correlated to market movements and play out in a relatively short time frame.

Unicredit rights issue – update

Tomorrow will be the last trade date for the subscriptions rights. So far, the shares are doing really well. the subscription rights recovered from a low of ~0,45 cents to currently around 2,12 EUR.

This is still well below the theoretical value of 2.29 EUR ((3.09-1.943)*2).

Looking at the relative Performance:

Since the rights started trading (January 9th), Unicredit has outperformed the FTSE MIB by +35% and competitor Intesa by +25%, howver since January 1st, Unciredit has underperformed the MFTSE MIB and Intesa by ~-26%

In the last few days, some good news emerged:

– the Abu Dhabi Sovereign Wealth fund had committed to increase its stake
– Zurich Financial Services seems to be interested in buying part of the Turkish JV

So from a investment point of view, a lot of the forced selling seemed to happen in the first 2 days of the subscription right trading period. I had expected that towards the end the price would come down again but it doesn’t look like that at the moment.

Dispite the significant discount of the rights, I will not start a long/short trade, as a lot of the expected outperformance has already occured in the last few days.

Unicredit rights issue watch & correlations & some research for deeply discounted rights issues

Unicredit:

This is not really a surprise: Today, on the first day the Unicredit rights traded separately (Ticker: UCGAA), the pressure on the stock continued.

The theoretical price of the right at the start of the day would have been 1,26 EUR, currently they are trading at ~95 cents, after hitting a low of ~85 cents in the morning. With the share at 2.44 EUR (again -7%), the theoretical price should be (2.44-1.943)*2= =0.994 EUR, so there is only a slight mispricing at the moment.
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Efficient capital markets – Unicredit rights issue edition

In any finance course, market efficiency is one of the most important parts of the curriculum. The Therory says the following:

There are three major versions of the hypothesis: “weak”, “semi-strong”, and “strong”. The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or “insider” information.

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