Royal Bank of Scotland's announcement of a £12bn rights issue presents its shareholders with a dilemma, stockbrokers said yesterday. Richard Hunter, head of UK equities at Hargreaves Lansdown, said investors with RBS stakes now had four choices.
The exact numbers can only be worked out once RBS shares go ex-rights, on a date yet to be announced by the bank. But based on the terms of the fund-raising – shareholders are being offered 11 new shares at a price of £2 for each 18 shares they currently own – it is possible to make some preliminary calculations.
The first option is for shareholders to take up their rights in full so as to leave their holdings undiluted following the issue. An investor with 1,800 shares could buy 1,100 new shares at a cost of £2,200, taking their stake to 2,900 shares with a total cost of £8,680, assuming a current RBS share price of 360p, marginally above the closing price last night. That would give the stock a theoretical ex-rights price of 299p.
Alternatively, investors could choose to sell their rights in the market before the issue takes place. The price of the nil-paid rights trading in the market, based on these assumptions, would be 99p (299p minus 200p). Selling in the market would thus net £1,089, minus broker's commission.
The third option is for investors simply to do nothing, allowing their rights to lapse. Shareholders who take this option will automatically receive a cheque from RBS once the rights issue is completed, with the value of the rights based on the prevailing market price when the offer closes. This has the advantage that there would be no stockbroker's commission to pay, but offers no certainty on value.
Both option two and three require shareholders to accept a dilution of their ownership of RBS. The final option is a halfway house, selling just enough rights to cover the cost of buying additional shares with no actual financial outlay. Based on these prices, and ignoring commission costs, shareholders could sell the rights to 736 new shares for £728.64, funding the £728 purchase price of 364 new shares and only partially diluting their holdings.