Access Bank shareholders have approved a N68billion rights issue for the bank in its bid to strengthen its capital base. The bank will be offering 7.64 billion shares at N8.9 per share in fresh equity via a rights issue to bolster its capital base, the bank said on Monday.
The Tier 1 bank will be issuing 7.64 billion shares at 8.90 naira in a 1 for 3 rights issue each to existing shareholders. The rights issue price currently trades below N9 and closed today at N8.71. Diamond Bank which concluded its rights issue some weeks back offered the rights at a discounted price of N5.8 when it was trading at above N6. Whilst it is not unusual for companies to issue rights at a price higher than the market price, Access Bank’s decision does come with a surprise when you consider the several flip flops and controversy surrounding their technical suspension just before they had their board meeting.
The share price has faced a beating since the suspension was lifted and now trades much below its rights issue price despite releasing impressive results which may have seemed rushed to some naysayers in retrospect. It makes me wonder if the bank had already agreed what price it wanted to sell its shares and as such may have been the reason for trying to suspend trading on the stock when it was trading above N9. Another angle surround rumours that the bank may have been trying to fend off some investors who may have takeover intentions on their mind making this move a sucker punch to any takeover ideas.
At this rate it seems more attractive to purchase the stock in the open market where the price is cheaper than the Rights Issue price except off course trading is suspended again (which is unlikely). The reason why companies issue rights issues lower than the market value is to ensure the price is attractive for shareholders to purchase, enabling the company raise money. However, at a market price of N8.7 it seems unrealistic that someone like me, a shareholder will prefer to take up the rights at a higher cost when I can simply buy the shares in the market at a cheaper price even if its risk dilution.
Institutional investors with significant interest in the bank may take up their rights issue but I see no reason why as a retail investor I will want to take up these rights at a premium. There is no incentive I see to make me want to take up the rights except of course the share price finds its way above N9 (which is very possible) or if I owned the shares at an average price that is above the current rights issue price. In summary this is what I will do as a shareholder.
Scenario 1: Current Share price (including broker fees) remains below rights issue price
- If I bought Access Bank at an Average Cost (including broker fees) that is higher than Rights Issue price of N8.9, I forgo rights and buy at market price.
- If I bought Access Bank at an average cost (including broker fees) that is lower than rights issue price of N8.9 I will buy at market price and forgo rights
Scenario 2: Share price (including broker fees) remains above rights issue price
- If I bought Access Bank at an average cost (including broker fees) that is higher than Rights Issue price of N8.9 I’d pick up my rights.
- If I bought Access Bank at an average cost (including broker fees) that is lower than rights issue price of N8.9 I will pick up my rights (key word is remains)
This equation changes when the banks finally announces its qualification dates. A qualification date that is for example before September suggest those who bought just before then will see the rights issue price as a discount.