First Bus Rights Issue

loofer

Ark_Welder wrote: »

What you can see in your account are not new shares - not yet - they are called nil paid rights, and represent your entitlement to the allocation of new shares under the rights issue. These new shares would be in addition to the shares that you currently hold, not replacements for them.

A rights issue is a method by which a company can raise cash, so you will not be getting free shares, you will have to buy them if you want them, and the cost is 85p each. You do not have to buy new shares if you do not want them: you can either sell the rights now, just as you would with shares (current bid price is around 14p each), or you could allow them to lapse (i.e. you do nothing) and you might get some cash if the price of the existing shares is higher than the issue price of the new shares.

Note that your existing shares have fallen by around 23p today to reflect the fact that they are now trading ex-rights, i.e. the holder is entitled to subscribe to buy their allocation. If the price of the existing shares remained at 99p and you stumped up the cash for new shares (i.e. turning your nil paid rights into fully paid rights) then your 85p cost price would be turned into a new share worth 99p. However, the price of the existing shares could also fall to less than 85p, in which case you would have been better off by allowing the rights to lapse and buying additional shares in the open market. Or the price could rise above 99p, so your 85p purchase by taking up you rights would work out even better. So what you decide to do ought to depend upon: a) whether you have the cash to take up the rights; b) how you view the prospects for the company; c) what your view is of the reasons for the fundraising.

Have a read of the RNS because it will give you an idea of why FGP is raising funds. Also google rights issue definition to get more information of what is involved. I would suggest doing this before deciding what to do. But as a couple of starters:

http://www.investopedia.com/articles/stocks/05/062905.asp
http://en.wikipedia.org/wiki/Rights_issue

Thanks.
Strangely enough, immediately after posting my question I did a search on google and came across those 2 sources. The investopedia was quite helpful.

Are rights issues always this bad? In the sense that just because the company sets a preferential rate (85p in this case) the market drops the price of the original shares to near enough the preferential rate. Kind of removes the incentive to snap up the rights issue and non-shareholders also reap the benefit of purchasing vastly discounted shares on the open market (ok at 99p rather than 85p but its way better than £1.80 ish)

Does the market always follow suite and erode the price of existing shares?
This is what has annoyed me most. IMHO It wasn't the announced profit drop that has made me such a big loss on my investment (though a loss was to be expected). This single decision to issue rights has halved my original investment!

Also, if I sell my rights today, say for current 14p, the new owner I assume would then still have to purchase the the new shares at 85p each, which then puts them shares as bought at 99p - which is roughly what they can buy ordinary shares on the existing market for anyway. Why would they bother? And if these new shares don't get bought then the company hasn't achieved much by way of raising capital.

Obviously you can tell I'm quite annoyed by the impact it has had on my personal investment. I'm guessing shareholders always turn out to be losers if this is how rights issues work ( unless you got the shares originally at or below ex-rights price).

Ark_Welder

loofer wrote: »

Are rights issues always this bad?

No. How they affect the prices of the current shares depends upon the reasons for the issue, the amount of the issue, as well as general market sentiment at the time of the issue. FGP is basically raising capital to shore up its balance sheet: the proceeds will largely be used to pay down short-term bank borrowings. To me, that is a negative reason for having to raise capital. Plus, the amount being raised was the equivalent to just over half the capitalisaion of the company at the time of the announcement (assumes a price of 223.8 being the last closing price before the announcement was made). So quite dilutive for existing shareholders, and for - what I would term - 'bad' reasons. Reasons for investors to sell out, which is what happened after the announcement had been made. Especially if combined with the current general market sentiment.

What can also happen is that some investors sell existing shares to raise enough funds to take up their entitlement: it's a method of turning a quick buck.

loofer wrote: »

In the sense that just because the company sets a preferential rate (85p in this case) the market drops the price of the original shares to near enough the preferential rate. Kind of removes the incentive to snap up the rights issue and non-shareholders also reap the benefit of purchasing vastly discounted shares on the open market (ok at 99p rather than 85p but its way better than £1.80 ish)

The fall in price yesterday was due to the existing shares trading ex-rights. The closing price before the XR date was 122.8, and with the terms of the issue that would give and XR price of 100.12 [ = (122.8 x 2 + 85 x 3) / 5) ].

The incentive for existing shareholders is to maintain the proportion of their holding in the company. Using the calculation above, if they do not subscribe to the issue then their percentage holding in the company will have fallen by 60% (they held 2 / 2 before the issue, they hold 2 / 5 afterwards). So their share of any distributions (e.g. dividends) is reduced accordingly - assuming there are distributions to be made.

loofer wrote: »

Does the market always follow suite and erode the price of existing shares?

Rights issues that are raising capital for positive reasons, such as investment and expansion, or to buy another business (if these are ever positive...), or those that are raising a comparatively small amount will have less of an affect on the current share price: the company remains an attractive proposition so there is less incentive to sell the existing shares, and more incentive to take up the allocation. It is the capital raising is being done for negative reasons that will cause a share price to fall most.

loofer wrote: »

Also, if I sell my rights today, say for current 14p, the new owner I assume would then still have to purchase the the new shares at 85p each, which then puts them shares as bought at 99p - which is roughly what they can buy ordinary shares on the existing market for anyway. Why would they bother?

The new owner does not have to buy the shares, they still have the same options as you do now: i.e. sell the rights to someone-else, make them fully paid (so they do buy the new shares), or let them lapse.

Why anyone would bother to buy additional rights might be for the potential of a short-term gain, or because they don't have enough cash right now to buy at 99p, but will have in a couple of weeks and can put a down payment of 14p on them now. Perhaps, what they will be selling to raise the cash is doing well, and they want to leave it invested for a bit longer - might be approaching an ex-dividend date (it might even be earning interest! I remember interest...), so they expect the price to rise a bit further in the meantime. Or they might not be sure how things will develop over the next few weeks, so putting down just 14p now gives them a bit extra time: they are not committed to anything, and the rights may still have value at the end of the two weeks.

Stamp duty is payable on buying nil paid rights in the market, but there is no stamp duty to be paid when converting these rights into fully paid rights, i.e the new shares are being bought. So stamp duty is being paid on only the 14p and not the full 99p, which would (might) be the case if the shares were bought in the market. This might not amount to much of a saving for smaller holdings, but it could do for larger holdings.

Rights are also a geared play on the current shares: if the shares rise from 99p to 105p the rights should rise from 14p to 20p: the 6% rise in the share price causes a 43% rise in the nil paid rights price. Obviously, the opposite could happen and the share price falls. But short-termist risk takers might be happy to play this game, or those that believe that the company's prospects are good. Not a game for someone like myself to play, though.

loofer wrote: »

And if these new shares don't get bought then the company hasn't achieved much by way of raising capital.

The company has raised the cash that it wanted. The RNS linked to in a previous post states that the issue is fully underwritten. This means that the investment banks involved in the issue will buy any new shares that existing investors do not want. So the company gets its cash regardless. The risk to the investment banks of ending up with a large rump of shares is one of the reasons that their fees are about. In the event that they do end up with a good many shares, they will try to offload these into the market - but usually all at once unless they can find corporate buyers - and this will tend to keep the price of the new shares depressed until the situation is resolved.

Bazofts_Revenge

I've had a message from my broker explaining the whole process now. Need to make a decision by the end of next week. Anyone else out there check your emails.

A_Flock_Of_Sheep

First Group as a company look a bit wobbly to me. Heavily in debt and WAS paying a dividend that was too good to be true.

Bazofts_Revenge

A_Flock_Of_Sheep wrote: »

First Group as a company look a bit wobbly to me. Heavily in debt and WAS paying a dividend that was too good to be true.

Whilst it is out of favour it will be cheap, I only put £1k into these. I feel it could still be a good long term punt. I will be buying my extra shares.

lentrix92

Sub £1 - worth buying and 'tucking away'

sabretoothtigger

Firstgroup shares rose 8% today and the rights which I think anyone can buy and sell, rose 100% in just one day!

Not even that risky? as all it does is put you into ownership of the underlying shares, options are massively profitable for people who have a clue of such things.

JIIS was the option or subscription share for the Investment trust JII. Again massive moves possible, iii wrote an article on them. Now expired/transformed

Seems alot smarter then spreadbetting but each option risks total loss. Also if you do carry alot of shares, its possible to write out an option on your holdings. Not something I take part in but it relates to rights

Here is a graph for anyone interested in their may fly existence

plunt

any update on what people recommend to do?

1) sell nil paid rights now
2) wait till 26th and broker auto sells nil paid right
3) take up the option
4) Sell enough of the nil paid rights to pay to take up part of the option
5) any other choices I have not considered

Any comments and advice is highly welcomed (ofcourse doing your own research will be a comment) . Justification of why you make a certain choice would also be nice

cheers

P

sabretoothtigger

3 take up. Unless you really dont like them because its the worst time to sell

studentdave

If I take up the rights issue? How do I sell the shares? I was issued and bought the shares through the company (FirstGroup). Will I automatically have a broker?