I have held RPC for 13 months now, and it has performed very well over that time, up 55%. It is one of those shares I have been thinking of selling in the not-too-distant, as its stock rank is not that compelling (except for the momentum that is...which makes me think I want to hold on for a while longer)
However, now those of us who own RPC are being offered what seems a generous offer on the face of it. RPC is offering a one for five rights issue, in order to acquire global GCS group. The price they are selling these rights for is 460, quite a discount from the current price of 763. So the choices are... I can either buy these shares, or sell my rights to these shares, or do nothing and see if they pay me something eventually for them once the deadline is over. Once or twice in the past, I've bought rights issues when offered and I've noticed the shares dropped.. I suppose this is inevitable, or is it?
So my question to fellow private investors is what are your thoughts about rights issues in general, and also specifically RPC? What would you do in my shoes? Thank you, I look forward to a discussion, in what is my first post here.
Hi Joy - I don't really have a view on RPC (not one of my holdings) but happy to offer some commentary on the mechanics of a rights issue to get the ball rolling.
RPC is issuing new shares to raise equity to fund its proposed acuisition of GCS. Under the terms of the RI, you are being offered the chance to buy 1 new share @ 460p for each 5 shares you own currently valued @ 763p. (Not sure what the original RPC share price was on the date RI was announced, but ideally you should use this as your 763p figure in the above calculation as there will already be some market reaction to the merits of the RI embedded in the current share price).
As you say, these new shares are being offered at a discount of about 40% to the current market price. However, this doesn't mean the new shares are necessarily "cheap" since once they are issued it is likely that the price of all shares in issue will drop to the fully diluted ex-rights level. Assuming the market is "neutral", i.e. doesn't think the proposed acquisition will increase or decrease value, the theoretical ex-rights price (i.e. value per share after the rights issue has gone through should be about 713p ((1 x 460) + (5 x 763))/6), i.e. about 6.5% below the current share price. (Put another way, this is the same as the c.40% discount on the one new share spread over the 5 old plus one new share (40/6~=6.5%)). The deeply discounted price of the new shares is a pretty standard feature of most rights issues and this is why, in the past, you have probably seen the share price drop after previous rights issues have taken place.
Your right to buy the new shares at 460p (i.e. 253p below the ex rights price of 713p) has a value and as you say you will be able to sell these rights with reference to, but not usually exactly the same as, this 253p. This will vary between now and the end of the rights offering period according to general market conditions and general supply and demand for the RPC rights/shares. You have several options (exercise the rights and buy new shares; sell the rights now and keep the cash but have 1/6 less of your current equity in the company; let the rights lapse at which point the company broker will sell them on your behalf and give you the proceeds.)
One further option you overlook which you will probably be offered is to arrange to sell a proportion of your rights that will give you exactly the proceeds needed to buy some of your new share allocation with the remaining rights that you do not sell. For simplicity, if the 253p figure shown above was 230p, you would have to sell 2 rights for each 460p new share acquired - you would get 1/3 of a new share for every 5 shares you currently hold. In this way you would get some new shares but would not need to pay in any new cash. You would still experience some dilution (your proportion of the overall company equity will be slightly reduced) but by less than if you sold all the rights. The company would still get its cash as the rights that you sell would presumably be exercised by the rights buyer into new shares. At any point you also have the option to sell your underlying RPC holding (i.e. pre or post rights issue) and cash out the entire amount.
In theory, if the company simply held onto the cash proceeds from the RI the whole thing would be an exercise in "smoke and mirrors" since the new cash would be an asset (in the company's rather than your bank account) and you would have the same proportionate share in the same overall asset pool. However, there are significant transaction costs (I note the RI is fully underwritten) which take out some of this new cash and in this case the company is spending the cash on an acquisition.
In terms of what action you should take that very much depends on factors such as whether you have available/want to put more cash into the company and whether you think the acquisition will increase the overall value of your holding. Hopefully you will get some indications from other investors on this thread as to what their thinking is although as always it is very much your decision and if in doubt you should seek some independent financial advice.
Hope this helps to at least understand some of the mechanics.
Good luck.
Gus.
