advice please on share with corporate action

happyhero

Hi I have some shares in an ISA with Hargreaves Lansdown and they have just announced corporate action which seems to work well in my favour but I'd like someone elses opinion to be sure I am not missing anything.


The share is called AB Dynamics (ABDP is the code). The offer is as follows:-



The offer says:-
Option 1 – Do nothing. If you do not return an election by the deadline of noon Monday 3 June 2019, the Offer will lapse.

Option 2 – You can purchase new Shares. The terms of the Open Offer allow you to buy 1 new Ordinary Shares for every 86.5021363 existing Ordinary Shares held at the close of business on 17 May 2019. The new Shares will be identical to your existing Shares in terms of your Shareholder rights and will cost £22.00 each. As a result you have a Basic Entitlement to purchase up to 1 Shares at a cost of £22.00. One AB Dynamics plc Entitlement has been credited to your portfolio for each new Share that you are entitled to purchase. You may also apply for Shares in excess of your Basic Entitlement. You may purchase Shares either within your ISA or outside of your ISA. Please refer to the Questions and Answers for details on how to purchase the Shares on offer within or outside of your ISA .



The current price to sell for these shares is 2690 pence.


Buying them and soon after selling them at those prices gives me a 22% profit if I am understanding this correctly.


The worry is that the price immediately collapses upon the purchase of these cheap shares and I have no idea if this is likely to happen.


The temptation for me is to buy even more than I am entitled to as it states that I can buy in access of the offer and also for 2200p. I would have to put some new money in my ISA to do this and this is quick to do if I take the money from other sources.


If I did do this I would take money from another account with the intention of replacing it after selling the share, ie for example try and buy £5000 worth of the share then sell it a few days later and withdraw the money replacing it from where it came from.


|Can anyone give me their opinions of this share and the offer and what they think might happen and also what they would do in my shoes with this offer. Also tell me if they think I am missing anything.


Any inputs appreciated.

Thrugelmir

happyhero wrote: »

The worry is that the price immediately collapses upon the purchase of these cheap shares and I have no idea if this is likely to happen.

The market price will fall in reaction to the rights issue. Whether you believe the shares to be cheap or not depends on your view of the company. By not buying the shares on offer your existing holding will be diluted.

happyhero

Thrugelmir wrote: »

The market price will fall in reaction to the rights issue. Whether you believe the shares to be cheap or not depends on your view of the company. By not buying the shares on offer your existing holding will be diluted.

Thank you for your reply. Your comments make me feel inclined to sell my holding while the price is high enough that I am currently in profit, ie take the money and run while the goings good.

What would you do?

This share has been a strong climber so that would lead me to think it will soon climb out of any drop and make good and fall, oh this is so torturous to decide on.

I suppose a tactic might be sell while high, knowing it will drop and then buy back itn cheap once its dropped.

Tom99

Base on the c£50m they are raising and the current price you would expect the price to drop by about 50p when the rights shares go live, about 2%

bowlhead99

With your small shareholding you literally have the right to buy 1 share in the fundraising to avoid being diluted. If you are happy with your holding, it makes sense to take up that right at a cost of £22, but if you chose to immediately sell that one share at a price between 22 and 27 you would lose money because presumably your broker charges you a fiver or more to process a sell order.

By all means, apply to buy more in the open offer in case there are some people who don't want to take up their rights. However, your application for the excess will be scaled back when there aren't enough shares to go around, because the larger investors will presumably scoop up as many as they can at the discount. You might find it frustrating to, e.g., add £2000 to your iSA to buy another hundred shares or so, and only be allocated £100's worth, having used up £1900 of your ISA allowance and perhaps not having any other investments you want to buy at this point. But if you have spare ISA allowance and cashflow, no harm done.

happyhero

bowlhead99 wrote: »

With your small shareholding you literally have the right to buy 1 share in the fundraising to avoid being diluted. If you are happy with your holding, it makes sense to take up that right at a cost of £22, but if you chose to immediately sell that one share at a price between 22 and 27 you would lose money because presumably your broker charges you a fiver or more to process a sell order.

By all means, apply to buy more in the open offer in case there are some people who don't want to take up their rights. However, your application for the excess will be scaled back when there aren't enough shares to go around, because the larger investors will presumably scoop up as many as they can at the discount. You might find it frustrating to, e.g., add £2000 to your iSA to buy another hundred shares or so, and only be allocated £100's worth, having used up £1900 of your ISA allowance and perhaps not having any other investments you want to buy at this point. But if you have spare ISA allowance and cashflow, no harm done.

Do you think £5000 of excess shares is too ambitious for the excess amount considering everything, ie is there very little chance of me getting that much excess?


I ask because I am considering what you said about using ISA allowance only to be allocated a small amount and I will be wanting to take the money back out of the ISA rather than use it to buy other stocks.


What would you do in my shoes?

bowlhead99

If you apply for £5k, or £1k or £100k, you won't get it. Whatever you apply for will get scaled back proportionately to reflect how many people would want to buy at £22 what is trading at £24+. It is a £500m company so most of the investors will have deeper pockets than you and will routinely apply for excess allocations if there's a reasonable discount to market value . So if you really want £5ks worth you may need to apply for several times that.

In your shoes, I would do the excess application in a non ISA account, apply for a significant amount more than I actually wanted; and then once I have the actual shares I want, consider whether to keep them there unwrapped or sell at market price and use the proceeds to fund a purchase inside the ISA ('bed and ISA transaction'). As the latter involves spread and dealing fees I might just keep them in the unwrapped general investment non ISA account, depending on amounts involved, though if you don't already have a non ISA accounts and there are extra ongoing platform costs to get one, I might not bother.

I wouldn't put £5k into the ISA just to do the excess offer if I wasnt happy to keep it there and invest in something else, given I might only be allocated 5-10% of what I applied for. The percent allocated is unknown until it happens

Tom99

bowlhead99 wrote: »

If you apply for £5k, or £1k or £100k, you won't get it. Whatever you apply for will get scaled back proportionately to reflect how many people would want to buy at £22 what is trading at £24+. It is a £500m company so most of the investors will have deeper pockets than you and will routinely apply for excess allocations if there's a reasonable discount to market value . So if you really want £5ks worth you may need to apply for several times that.

In your shoes, I would do the excess application in a non ISA account, apply for a significant amount more than I actually wanted; and then once I have the actual shares I want, consider whether to keep them there unwrapped or sell at market price and use the proceeds to fund a purchase inside the ISA ('bed and ISA transaction'). As the latter involves spread and dealing fees I might just keep them in the unwrapped general investment non ISA account, depending on amounts involved, though if you don't already have a non ISA accounts and there are extra ongoing platform costs to get one, I might not bother.

I wouldn't put £5k into the ISA just to do the excess offer if I wasn't happy to keep it there and invest in something else, given I might only be allocated 5-10% of what I applied for. The percent allocated is unknown until it happens

If the excess application is only available to existing shareholders might doing it in the ISA account be the only option?

george4064

Thrugelmir wrote: »

The market price will fall in reaction to the rights issue. Whether you believe the shares to be cheap or not depends on your view of the company. By not buying the shares on offer your existing holding will be diluted.

Just to add something from my own experience and echo Thrugelmir's post, it really depends on your circumstances (i.e. have you got extra cash to invest or do you need to draw down some money from your ISA or do you need to rebalance your portfolio a bit (either into or away from AB Dynamics) and also your personal belief of the company's future prospects. You should also consider for what reason they are doing the rights issue and how that may affect the future prospects of the company.


I used to own Paysafe PLC shares and they did a huge rights offer to fund an acquisition of a new company (reverse takeover), I decided to take up my rights in full because I believed that the company's prospects were good and particularly with the acquisition. By taking up my rights in full I nearly double-downed my investment, but I'm so glad I did because a while later the company got bought out by a private equity firm for a hefty premium. (However I actually was not too happy with the private equity buy-out because I actually wanted to hold onto the shares since I believed they had a lot of growth ahead of them, unfortunately the private equity company took it all with the leveraged buy-out).

bowlhead99

Tom99 wrote: »

If the excess application is only available to existing shareholders might doing it in the ISA account be the only option?

The broker / platform provider will most likely be a shareholder of the company both via its ISA nominee and general investment account entity, so would have the ability to make excess applications to the open offer from either side, and if it's a genuine Open offer to the public they wouldn't even need to be a shareholder to facilitate a purchase by one of their customers.

I'm only going off what the OP mentioned, "You may purchase Shares either within your ISA or outside of your ISA. Please refer to the Questions and Answers for details on how to purchase the Shares on offer within or outside of your ISA ."

If there are terms or conditions to the offer, the OP is better placed than you or I am to find out what they mean in practice, as he's the one who has the offer and links etc.

But basically if the question to me is "what would you do", I would attempt to take up the offer outside of my ISA where there was no risk of damaging my remaining Isa subscription allowance on a dud.

londoninvestor

This article is not a bad guide to how rights issues work:
https://www.sharesmagazine.co.uk/article/how-rights-issues-work-and-the-decisions-investors-need-to-make