What’s wrong with rights issues?

TheStar Sat, Jan 19, 2019 08:07am - 5 years View Original


Malayan Flour Mills Bhd (MFM) and Sapura Energy Bhd (SEB) recently came into the limelight as two companies with two distinct business operations which decided to tap into the deep pockets of their respective shareholders via a rights issue exercise.

In MFM’s case, the rights issue involved the issuance of five-year, 5% redeemable convertible unsecured loan stocks (RCULS) of RM1 each on the basis of three RCULS for every 10 shares held, which comes with one bonus share and one free warrant for every two RCULS subscribed. Each RCULS was priced at RM1. Hence, a shareholder with 10,000 MFM shares will subscribe to 3,000 RCULS and at the same time receive 1,500 bonus shares and 1,500 warrants.

   

In addition, MFM also carried out another rights issue concurrently, whereby it involved a rights issue on the basis of two for five, which comes with one bonus share and one free warrant for every four shares subscribed.

The rights issue was priced at RM0.50 per share. Effectively, a shareholder with 10,000 shares would subscribe to 4,000 rights shares and receive 1,000 bonus shares and 1,000 free warrants. All in, a shareholder with 10,000 shares ends up with some 16,500 shares (10,000 original shares, 1,500 bonus shares from the RCULS subscription, 4,000 shares from the rights issue and 1,000 bonus shares from the rights issue subscription), 3,000 RCULS, and 2,500 warrants for a total cost of RM5,000 (RM3,000 for the RCULS and RM2,000 for the rights issue). The RCULS conversion price is at RM0.50 per share, while the warrants have an exercise price of RM0.68 per share. MFM is expected to raise between RM220mil and RM275.1mil from the above exercise, of which 88% or 79% of the funds raised will be utilised for capital expenditure (capex), which includes repayment of revolving credit facilities for the capex.

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