Cazenove, one of two brokers for British Telecommunications, has warned professional investors and hedge funds that they will not be allocated any of the company's surplus rights if they are caught shorting BT stock.
Some hedge funds have sold shares in BT that they do not already own in the hope of buying the rights to the BT shares at a large discount, thereby making a profit on the difference in price. That is one of the factors thought to have been behind the weakness in the BT share price since the rights issue was announced.
BT launched the UK's biggest-ever rights issue last month and is planning to raise £5.9bn by offering three new shares for every 10 held, at a price of 300p each. Shareholders will have until 9.30am on 15 June to accept the offer.
However, because many of BT's private shareholders were not expected to take up their rights, the company's brokers Cazenove and Merrill Lynch might well be left with a substantial chunk of rights that they will have to place with institutions.
BT's brokers have until 3pm on 21 June to find new investors to take up any surplus rights. Some analysts have speculated that the overhang could be as much as 250 million rights.
City Index, a spread betting firm, was yesterday quoting a spread of 84-86 percentage take, indicating that it expected 14-16 per cent of BT's investors will not take up their rights. About 17.5 per cent of BT's shareholders are private individuals. The balance of the company's equity is held by institutions.
Even though BT's share price has fallen since the rights issue was announced, many private-client stockbrokers were yesterday still advising individuals not to take up their allocations.
Killik & Co, a private-client broker, said it would still advise its retail investors to sell their rights, even at the lower levels.
Paul Killik said that advice was based on there still being too many uncertainties attached to BT. "We can't see where the excitement is going to come from. In these markets, there are more interesting things to get into," he said.
A spokesperson for Barclays Stockbrokers said they too were still advising their clients to sell the rights.
"The shares have fallen some way, but even at these levels they don't look good value compared with the other incumbents," the Barclays spokesperson said, adding that the company's growth opportunities seemed "limited".
Kevin Lapwood, an analyst at ING Barings, said he thought there was no doubting that the rights issue would be a success but he added: "There is going to be a big lump of stock to be placed."
BT needs to raise the cash from the rights issue to reduce its debt pile of about £30bn.
BT shares closed up 2.6 per cent yesterday at 432p.Reuse content