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