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TUI - Rights Issue

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OLTB
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TUI - Rights Issue

#374357

Postby OLTB » January 7th, 2021, 2:54 pm

Afternoon all.

TUI is a constituent of my HYP and I have had an email through from HL saying that TUI will allow shareholders to buy 25 new shares for every 29 held at a price of €1.07 per share.

As TUI is not paying a dividend at the moment it wouldn't be a choice for a new HYP, but as I have shares already, does it make sense to take up the offer so as not to dilute my holding?

The message also says that the share price will drop once the qualifying point for the rights issue passes - would it be expected to drop roughly to the €1.07 figure quoted above?

Thanks in advance for any clarity.

Cheers, OLTB.

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Re: TUI - Rights Issue

#374375

Postby johnhemming » January 7th, 2021, 3:43 pm

Its an interesting one. I think we will see a lot more of this sort of thing.

One problem is that the broker target prices for TUI are around EUR 3.55

Also often when people take part in rights issues they turn things around by selling the shares reasonably quickly.

However, when the price is so deeply discounted it would be surprising if the price came anywhere close to the offer price.

If It were me I may try selling cum rights with a view to buying back later or participating in the rights issue. I don't think I would fail to take up the rights. I might even do both with half of the holding. You can, of course, sell enough to take up the rights.

This, however, is a difficult one to work out as you have the German government taking a stake possibly of 25% as well as this query about what happens in terms of rights.

I would not see that much of a short term turn on it because quite a few people will go for that.

Someone else may do a better analysis looking at the wider questions of dilution and what may be happening with the Germans.

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Re: TUI - Rights Issue

#374401

Postby tjh290633 » January 7th, 2021, 4:42 pm

My general rule with rights issues is that, if the share has an acceptable yield and taking up the rights would not take the holding too far above the median holding value, so that I might have to trim it back immediately, then I take up the rights. Otherwise I sell the nil-paid rights in the market.

In the case of a non-payer like TUI, I would sell the rights and reinvest the cash in a share that is paying an acceptable dividend.

TJH

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Re: TUI - Rights Issue

#374484

Postby moorfield » January 7th, 2021, 7:27 pm

I sold my TUI yesterday. An ill advised foray into the travel & leisure sector.

Bear in mind two things
(i) TUI has a line of credit from the German Govt and, with or without a rights issue, will not pay a dividend until that is ended.
(ii) It (used to at least) pays its dividend once a year, each February iirc.

HYPsters will not see any income from this until 2024 at the earliest, IMHO. Avoid.

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Re: TUI - Rights Issue

#374520

Postby OLTB » January 7th, 2021, 9:06 pm

Thanks all for the replies - anticipating a return of dividends at some future point is very un-HYP like and needs my under developed talents as a soothsayer. The money could be better placed elsewhere so that is what I shall do.

Thanks again, OLTB.

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Re: TUI - Rights Issue

#374745

Postby Gengulphus » January 8th, 2021, 1:24 pm

OLTB wrote:TUI is a constituent of my HYP and I have had an email through from HL saying that TUI will allow shareholders to buy 25 new shares for every 29 held at a price of €1.07 per share.

As TUI is not paying a dividend at the moment it wouldn't be a choice for a new HYP, but as I have shares already, does it make sense to take up the offer so as not to dilute my holding?

No - as a general rule, it never makes sense IMHO for a small shareholder to take up a rights issue to avoid dilution (*). It might make sense to take up a rights issue for other reasons, but not for that one.

Why not? Basically, dilution is a reduction in the percentage of a company you own - but why do you care what that percentage is? If you own 0.0001% of a £10b company, your holding is worth £10k. If the company raises 25% extra capital and becomes a £12.5b company without you either adding capital to or removing it from your holding, your percentage holding becomes 0.00008% but the holding is still worth £10k. You've been diluted, but I don't see any way in which that's significant to you - what is significant to you is the value of your holding, and that's unchanged (by the rights issue itself plus the actions you take to avoid either adding or removing capital, that is - it might have been quite significantly affected by the news associated with company deciding to do the rights issue, whether that's having to raise extra capital to try to get through bad trading conditions, or wanting extra capital to take advantage of an acquisition opportunity, or something else).

The situation is different for large shareholders - e.g. a fund manager who has a £1b = 10% holding of that £10b company would see that holding diluted to an 8% holding if the fund behaved likewise, neither adding to the capital in its holding nor removing capital from it. That will make a noticeable difference to the fund's voting influence over the company, and that can affect the actual trading value of the holding. Or in a not-very-likely-but-possible scenario, a controlling holder of the company with a £5.5b = 55% holding would see it diluted to a 44% holding if they behave likewise and so lose control of the company (though they wouldn't require a great deal of support from other shareholders to control it in practice), which would considerably reduce the value of their holding. As a general rule, though, if your stake isn't big enough for you to have noticeable influence over the control of the company (which will basically always be the case for a normal HYPer investing in a normal HYP company) then IMHO you should completely forget dilution as a concern in rights issues.

What does matter to you is the capital you have invested in your holding, especially because it and the share's yield determine the dividend income you can expect to get from the holding. And there is an important point about that in the above, namely that the "without you either adding capital to or removing it from your holding" supposition I make does not mean "if you do nothing". If you do nothing in a normal UK rights issue and so let your rights lapse, then at the start of the rights issue your original holding of cum-rights shares gets split into a holding of ex-rights shares (which are the same shares as the cum-rights shares, just on a later date after they've gone ex rights) and a holding of rights, with the original capital value getting split between those two holdings, and then at the end of the rights issue the rights are effectively sold and the proceeds less selling costs returned to you as a lapsed-rights payment (that's assuming that the rights issue is successful - if not, the value of the rights will have shrunk to zero at the end of the rights issue). I.e. the net result of what happens if you do nothing is that you effectively sell a split-off part of the original capital value of the holding.

So doing nothing effectively removes part of the invested capital from it. So does selling off the rights, apart from the fact that the selling is an actual action on your part and so the word 'effectively' is no longer needed. And your third choice of subscribing to the rights effectively uses the capital split off into the rights as part payment for the new shares, with the other part being the subscription price - so it doesn't remove the capital split off into the rights from the capital invested in the holding and instead adds the subscription price to it. I.e. none of the three 'pure' options of subscribing to the rights, selling them or letting them lapse offered by a rights issue matches up to the "without you either adding capital to or removing it from your holding" supposition - to achieve it, you need to do a combination of actions. The main three such combinations are selling enough rights to raise the cash needed to subscribe to the rest (sometimes known as "tail-swallowing"), selling the rights followed by reinvesting the proceeds in more ex-rights shares, and letting the rights lapse followed by reinvesting the lapsed-rights payment (assuming one materialises) in more ex-rights shares.

However, all of that assumes you actually want to neither add capital to the holding nor remove capital from it. So really, the first thing to decide when dealing with this or any other rights issue is how much capital you want to have invested in the share. Then decide what actions you need to take to get acceptably close to that amount - noting that the LTBH nature of HYPs generally means that quite a wide range of capital values is "acceptably close" (though just how wide depends on the HYPer). So if you'd like the capital value to be rather less than it currently is or even the same as it currently is, doing nothing and letting the rights lapse may well be acceptably close for you - and that may actually be the case even if your preferred amount of invested capital is zero, if you regard a wide range of capital values as acceptably close (as 'non-tinkering' HYPers generally do). Or under the same conditions, you might prefer to sell the rights and get it over with, especially if you actually have a view about which direction the price is likely to go and that view is 'down'. Or if you'd like it to be more and you've got the cash to fund it, simply subscribing to all your rights might be acceptably close and the simplest option.

Or there's a wide range of other possibilities involving various combinations of market buys or sells with letting rights lapse, selling them or subscribing to them. I'll have to leave you and others with a holding of TUI to decide which suits them - my main point is that the crucial considerations for a HYPer when deciding how to deal with this or any other rights issue are IMHO how much capital they want to have invested in the holding (bearing in mind the company's current qualifications attributes as a HYP share), how much they currently have invested in it (i.e. the holding's current market value), and how big a difference between those two they regard as acceptable. Dilution shouldn't be a consideration unless you're running a HYP worth billions of pounds!

However, TUI is a German company and so this is not a "normal UK rights offer", as supposed in my general comments above about dealing with such rights issues. On looking at the prospectus for what it's doing here (which is available from https://www.tuigroup.com/en-en/investor ... l-increase after getting past some disclaimers) I find that it mainly describes this corporate action as a "Subscription Offer" and contains the following quote:

Unexercised Subscription Rights or DI Rights will lapse and will not be sold. The New Shares to which those unexercised Subscription Rights or DI Rights relate may be sold in the rump placement or pursuant to the commitment and backstop agreements, but shareholders will not be entitled to receive any proceeds from such sale, including any premium under Listing Rule 9.5.4 as such payment is restricted under the laws of Germany.

The Company is organised under the laws of Germany and the offering is therefore being undertaken in accordance with German company law and in line with German market practice. German market practice differs from market practice in certain other jurisdictions, including the United Kingdom.

Consequently, under the laws of Germany and in line with German market practice, Subscription Rights or DI Rights that are not exercised during the Subscription Period will lapse and be of no value. This includes any Subscription Rights or DI Rights that an investor acquires during the subscription rights trading period but that are not then exercised before the end of the Subscription Period. This differs to a typical rights issue conducted in the United Kingdom, where rights that are not exercised do not lapse, and would typically be sold in a rump placement following the rights issue, and shareholders would be entitled, pursuant to Listing Rule 9.5.4, to receive any premium over the subscription price (net of expenses and provided such amount exceeds £5) that can be achieved in such a sale.

That last sentence is incorrect, by the way, though not in a very significant way, at least as far as the way the process is normally presented to shareholders is concerned. That is that rights in a normal UK rights offer that are not exercised do lapse and are not sold. Instead, the shares that they would have become if exercised are sold in the "rump placement", if it's possible to do so for at least the subscription price (which it always is for an underwritten rights offer, to the underwriter(s) if no-one else), and any significant premium obtained funds a lapsed-rights payment.

What is far more important is its implication: if you own TUI shares, DON'T let your rights lapse! If you don't want to take them up, sell them on the market - if you don't, you will lose the part of your holding's capital value that has been split off into them. And don't leave selling them until the last day or two that they're on the market: only people who can arrange to get them exercised by the deadline will be potential buyers by then, and they may well only be willing to offer a low price by then, knowing that any sellers who are still around are effectively forced sellers...

By the way, apart from the last bit about the difference from a normal UK rights issue and not letting one's rights lapse, none of what I say above is specific to TUI or this offer - it's intended mainly as comments on rights issues in general. I know little about the company other than that it's a travel company and a foreign company, specifically a German company, and that I strongly prefer not to invest in foreign companies. My main reason for that preference is that they complicate my tax return, but this does illustrate a subsidiary reason: they can deviate from normal expectations for a UK-based HYP in quite possibly significant ways, adding unexpected complications to the maintaining one's HYP. Not saying that anyone else needs to dislike the complications of holding foreign companies as strongly as I do - but those complications do exist!

OLTB wrote:The message also says that the share price will drop once the qualifying point for the rights issue passes - would it be expected to drop roughly to the €1.07 figure quoted above?

No, the share price would be expected to drop roughly to €1.07 plus the market price of a right, since what you give up under the offer to acquire a share is €1.07 plus a right.

You would also expect the market value of 29 shares before they go ex-rights to be roughly the same as the market value of 29 shares and 25 rights afterwards. Putting those together, you expect the price of 29+25 = 54 shares after they go ex-rights to be roughly the same as that of 29 shares before they go ex-rights plus 25*€1.07 = €26.75, which implies that you expect the price of a share to drop to roughly:

(29*(share price before qualifying point) + €26.75) / 54

when the qualifying point passes.

Gengulphus

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Re: TUI - Rights Issue

#374962

Postby 88V8 » January 8th, 2021, 8:33 pm

Gengulphus wrote: if you own TUI shares, DON'T let your rights lapse! If you don't want to take them up, sell them on the market

Thankyou for this.
I have some TUI shares.
The offer hasn't ben tabled yet by ii, and I haven't decided what to do.
But as you say, doing nothing is not an option.
I suspect that a good many UIK shareholders will be caught out.

The IAG rights issue was the same; sell or lose.

Tricksy Foreigners. Huh.

V8

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Re: TUI - Rights Issue

#376548

Postby Fluke » January 13th, 2021, 12:03 pm

OLTB wrote:Afternoon all.

TUI is a constituent of my HYP and I have had an email through from HL saying that TUI will allow shareholders to buy 25 new shares for every 29 held at a price of €1.07 per share.

As TUI is not paying a dividend at the moment it wouldn't be a choice for a new HYP, but as I have shares already, does it make sense to take up the offer so as not to dilute my holding?

The message also says that the share price will drop once the qualifying point for the rights issue passes - would it be expected to drop roughly to the €1.07 figure quoted above?

Thanks in advance for any clarity.

Cheers, OLTB.



Pyad used to recommend tail swallowing when it came to rights issues whereby you sell some of your rights to raise just enough to take up the rest so that no new money was required. Some helpful soul on this board explained the calculation some years ago and I copied it as I knew I wouldn’t remember the next time I needed to do it. Here’s the calculation and I’ve done an example below based on an offer of 200 shares.

1) Calculate the number of rights you will receive (round down to the nearest whole number)
2) Calculate the expected price of each right (current Share Price MINUS Exercise Price)
3) Calculate the Exercise Price as a percentage of the Share Price
4) Multiply the number of Rights that you have by the Exercise Price percentage (Round Down to nearest whole number)

Offered 200 rights @ 100p (or thereabouts)

share price is 353p

Exercise price is 253p (353 - 100)

253 is 72% of 353

200 x 0.72 = 144

sell 144 @ 100p to raise £144

Buy (take up) 56 @ 2.55 costing £142


There will be a transaction fee in regards to the sale but not (I think) the purchase.

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Re: TUI - Rights Issue

#376550

Postby Fluke » January 13th, 2021, 12:06 pm

Buy (take up) 56 @ 2.55 costing £142


That should be 2.53 not 2.55

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Re: TUI - Rights Issue

#376589

Postby OLTB » January 13th, 2021, 1:54 pm

Fluke wrote:
Buy (take up) 56 @ 2.55 costing £142


That should be 2.53 not 2.55


Many thanks Fluke for your helpful example of tail swallowing and I, like you, shall keep this post as a useful reminder for any similar future event!

However, I elected to sell all my rights this morning and was about to post where the proceeds have gone!

All the best, OLTB.

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Re: TUI - Rights Issue

#376729

Postby Gengulphus » January 13th, 2021, 7:12 pm

Fluke wrote:Pyad used to recommend tail swallowing when it came to rights issues whereby you sell some of your rights to raise just enough to take up the rest so that no new money was required. Some helpful soul on this board explained the calculation some years ago and I copied it as I knew I wouldn’t remember the next time I needed to do it. Here’s the calculation and I’ve done an example below based on an offer of 200 shares.

1) Calculate the number of rights you will receive (round down to the nearest whole number)
2) Calculate the expected price of each right (current Share Price MINUS Exercise Price)
3) Calculate the Exercise Price as a percentage of the Share Price
4) Multiply the number of Rights that you have by the Exercise Price percentage (Round Down to nearest whole number)

Offered 200 rights @ 100p (or thereabouts)

share price is 353p

Exercise price is 253p (353 - 100)

I think you've gone astray there - the calculation you've done appears to be that in your step 2, but that step calculates the expected price of each right, not the exercise price! Furthermore, the exercise price is fixed by the rights offer at €1.07, so the only calculation needed for it is a euro-to-sterling currency conversion, and there's no need to calculate an expected price of a right now that the rights exist and are on the market: you can use the actual price instead!

The symbol for a right appears to be TUID, and the price of a right can be looked up e.g. on https://www.londonstockexchange.com/sto ... mpany-page. Currently, it's 266.60p, and according to https://www1.oanda.com/currency/converter/, €1.07 currency converts to 95.803p. Using those figures (*), selling one right therefore raises the funds to exercise 266.60/95.803 = 2.7828 further rights - i.e. each 1+2.7828 = 3.7828 rights you have requires one of them to be sold to raise the funds to exercise the rest. Or in other words, you need to sell 1/3.7828 = about 26.44% of your rights to raise the funds to exercise the rest.

More generally, if E is the exercise price and R the price of a right, each right you sell allows R/E further rights to be exercised, so you need to sell 1 out of each 1 + R/E = (E+R)/E rights to tail-swallow, i.e. to sell a proportion E/(E+R) of your rights. And as market forces will generally mean that E+R is close to the share price S, that's close (**) to a fraction E/S of the shares - which is the percentage calculated in your step 3. For example, currently the share price is 365.4p, so the E/S approximation says you want to sell 95.803/365.40 = 26.22% of your rights. And if you use that approximation that the share price is roughly the price of a right plus the exercise price, nothing uses the expected price of a right that step 2 calculates! So I'm afraid that your step 2 calculation both muddled up the price of a right and the exercise price and was completely unnecessary...

I should say though that in some cases, the approximation that the share price is roughly the price of a right plus the exercise price goes wrong. That happens if the share price drops down close to the exercise price and there appears to be vert little danger indeed of it happening in this case - but in cases where it does, you need to change step 3 to "Calculate the Exercise Price as a percentage of the (Exercise Price + the actual price of a right)".

So anyway, the current answer for your example of having 200 rights is that you want to sell 26.44% or 26.22% of your rights, both of which round up (for the reason explained below) to 53 rights. That raises 53*266.6p = £141.30, enough to pay the exercise price of 147*95.803p = £140.83 of the remaining 147. That assumes you pay the selling commission out of existing cash reserves; if you don't want to do that, and the selling commission is £10, you'll need to sell a few more rights. Each extra right you sell increases the cash raised by 266.6p and decreases the cash needed by 95.803p, so increases the cash available for paying the selling commission by about £3.62, so selling 3 extra rights for a total of 56 sold and 144 exercised will do the trick.

(*) But note that the exchange rate and any associated costs you should use are those used by your broker!

(**) Since share price fluctuations and selling costs will affect the calculation, and in this case exchange rate fluctuations as well, close is basically as good as you'll get. Selling costs will generally mean that you'll want to sell a few more rights to cover them, or else accept that your cash balance will drop a bit overall. The price and exchange rate fluctuations are likely to perturb it a bit more, though that could be in either direction. Overall, it's generally best to simply accept the overall effect on your cash balance, whatever it happens to be, though I would suggest rounding up to the nearest whole number in step 4 rather than down as likely to somewhat reduce the likely small negative effect on your cash balance.

One final thing to say is that many brokers offer an option on rights issues to ask them to sell enough rights for tail-swallowing and exercise the rest. That's the easiest way to tail-swallow if that's what you want to do - but don't be surprised if they're a bit conservative about it, probably selling a few more rights than they strictly need to. The reason is that they need to avoid any danger of the sale of some rights plus exercise of the rest ending up having a negative net effect on clients' cash balances, even a small one, because of the danger of surprising some clients by driving their cash balances negative.

Gengulphus

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Re: TUI - Rights Issue

#376999

Postby 88V8 » January 14th, 2021, 11:31 am

Just sold my rights for £2.78.

I hear on the wireless this morning that Seniors with vaccine euphoria, are booking coach trips. As they go through the tunnel, they will see light.

V8


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