Why the proposed Fidson Rights Issue is a good deal

The Board of Directors of Fidson Healthcare Plc have notified the Nigerian Stock Exchange and by so doing, the investment public, that the company would be issuing 750,000,000 ordinary shares of N0.50k each at N4.00 per share via a rights issue.

The proposed rights issue will be granting shareholders of record as at December 28th, 2018, the right to buy 1 (one) new share for every two ordinary shares held by paying N4.00 for each share. The listing is expected to open on Wednesday, March 6th, 2019 and close on April 9th, 2019. This rights issue seems to be a good deal for shareholders as it is currently in the money with very good intrinsic value. Fidson is currently trading at N4.7 and the right gives existing shareholders the right to buy it at N4.00, that is a 17.5% discount. A stock right gives the shareholders the right but not the obligation to exercise such right by buying the underlying stock. Since there is no obligation on the part of the shareholder to buy, shareholders could decide to let the right expire but a right issue that comes at a discount as high as 17.5% should not be allowed to expire.

While this rights offer may not be of value for anyone that buys Fidson Healthcare shares today or bought it after the record date, (since the record date to be entitled to the offer was December 28, 2018), it makes a lot of sense for anyone that held the stocks as at the record date to take advantage of the offer. The reason for this thinking is not only because of the discount as noted already but by virtue of the intrinsic value of the rights. Analysts calculate the intrinsic value of rights by calculating the theoretical value. The theoretical value of a stock right is nothing other than the market price of the stock less the subscription price of the rights divided by the number of shares it takes to receive one additional share through the rights issue. Therefore, the theoretical value of the Fidson Healthcare rights is

Where N4.7 is the stock price, N4 is the subscription price and 2 is the number of shares required to receive one more (this is a 2 for 1 rights issue)

What should A shareholder do

The question that I hear about or receive is what a shareholder should do under this or similar circumstance. Here are your options:

1. Let the offer lapse or expire without taking advantage of it. This is the costliest option because by not taking advantage of this offer, you have not only forgone this discount offered, but also you have had your holdings diluted as you will now be holding a smaller percentage of the issued shares after the rights than you had before the rights.
2. The next option is to look for someone that can buy the rights if you do not want to exercise your right. I have already calculated the theoretical value, this is theoretical because that value changes as the stock price changes until it starts selling ex right. However, it appears that the shares of Fidson Healthcare have remained at N4.7 since December 28, 2018. If that is the case, then you can sell your right for N0.35 each to someone that wants to buy the shares through the rights issue. Unfortunately, the Nigerian Stock Market does not seem to be trading on rights and this is an area that needs to be looked into to add liquidity and vitality to the market. Though this may have dilutive effect, but that has been compensated for by the money realised from the sale, at least partially.
3. Another and best option is to buy the shares you are entitled to by exercising your rights. This option is only available if you have the money to buy the shares, if you do not, the alternative is either to borrow money to buy the shares at N4.00 via the offer and then sell it at N4.7, pay back the loan and pocket your N0.7 per share gain. Unfortunately, again, there is no margin trading in Nigeria anymore or so is there? so you may need an alternative source for financing the transaction through this route. In the alternative, since your entitlement is based on your holdings as at the record date of December 28, 2018, you can now sell some of your shares at current market price, as long as that will not generate a loss, use the proceeds to buy the right entitled shares at N4.00 each. Then you can decide on whether to sell or hold on to it.

Other than letting the rights issue lapse or expire, whatever option you choose as an existing shareholder, this rights issue is a good deal unless the market price of Fidson Healthcare declines below N4.00 in which case the rights become out of the money with no intrinsic value, and I do not see that happening any time soon.