Companies issuing new shares

theshortstack

So a company I have invested in has just announced they're looking to raise additional funds by placing new ordinary shares on the market.

Can someone talk me through this process? What does it mean for those shares that are already on the market? And will these new shares come on at the current market value?

Is there anything else I need to be aware of?

Thanks,

Thrugelmir

Which company?

Is this a placing or rights issue?

theshortstack

Tungsten (TUNG) - it's a placing although as I say I'm not quite sure what that means. I would assume current shares would drop in value though.

bowlhead99

A placing is where the company employs advisers to 'place' the new shares that are created into the hands of new shareholders, at whatever price enables them to raise the funds. In this case they need to raise £12m cash to complete the acquisition of a company and support business growth.

The adviser/agent (in this case, Canaccord) will have a bunch of contacts that they know would be interested in participating - these may be institutional investors, high net worth individuals, investment funds and so on. Also, the directors have shown their support by pledging to buy a certain amount of shares or invest a certain amount of cash. As the placing has been announced, other people will contact Canaccord if they are interested in buying a big chunk of newly-issued TUNG shares via the placing instead of having to buy them on the market from a broker. They are trying to raise £12m so don't bother asking them if they'd like £100 from you towards the kitty

This process will set the price for the new shares at whatever is needed to raise the required funds from interested parties. So the company will issue a certain number of shares. Maybe it will be 4 million new shares issued for £3 each. Maybe 3.75m shares at £3.20 each.

The announcement contains the language, "On Admission, the Placing Shares will rank pari passu in all respects with the existing Ordinary Shares in the capital of the Company."

This basically means that the new shares will be considered equal to the existing shares that you hold or that you could buy on the market today for £3.40ish. They are not a new class of share with special rights. Once the shares have been issued they'll be admitted to trading on the markets in due course like all the others. So someone might buy them in the placing at £3.20 or whatever price they set the placing at, and then be able to sell them on the market at £3.50 or £3.00 or whatever price it is trading at on the stock exchange during September.

The price in August was in a range of £2.90 to £3.60 so that gives you an indication of what people might want to consider paying for the shares via the placing. The placing price is unlikely to be the same or higher than today's price, because if someone wanted to buy £10k of shares they can just go and buy existing shares on the market at that price. It is more likely to be lower because people may want a discount to be willing to buy so many shares. It could be higher, of course, because you probably can't just go and buy a million shares at £3.45 on the market today as that would be a whole percent of the issued share capital and the price would go up while you were buying.

So, long story short, some new and some existing investors will pay £x per share for the new shares. Depending on how much £x is, the company will have issued Y more shares to raise their £12million.

For you as an existing investor: if you used to own 100,000 shares out of the 100,000,000 shares in issue, you owned 0.1% of a company which had £z of assets. Now if they issue (say) 4 million new shares, you will own 100,000 shares out of 104,000,000 which is only 0.096% of the company, but the company has £z of assets plus £12million in the bank account and is able to take over DocuSphere and expand its business.

davisc02

Usually when a company issues shares its at a discounted rate to the current SP and the market can respond by reducing the SP to near the placing price. When I see a placing RNS in a company I am invested in I dread the markets opening. If you have good management and they use the money to expand or increase shareholder value then obviously the SP can rise. With a lot of the AIM companies a placing is often used to keep the pigs snouts in the trough.

theshortstack

You star bowlhead - thanks very much!