Purple Group shareholders take a beating

Charles Savage

Purple Group shareholders who exercised their rights have lost 28% of their investment value since the rights offer was announced.

Purple Group launched its rights offer last month, with shareholders having the option to buy new shares at a subscription price of 81 cents per ordinary share.

The company issues new shares at a ratio of just over 10.2 rights offer shares for every 100 Purple Group ordinary shares.

Purple Group said it had received overwhelming support, with gross demand equating to more than 113% of the rights offer.

The rights offer was concluded recently, and it was time to take stock of what it meant for Purple Group shareholders.

When the company first announced its intention to undergo a rights offer, the share price traded at R1.29 per share.

Investors faced a big decision – hold on to their Purple Group shares and exercise their rights, or sell their shares and not participate in the rights offer.

Using the R1.29 share price to calculate an ex-rights price delivers a share price of R1.25 per share.

R1.25 was, therefore, the breakeven share price that did not deliver any gains or losses to investors after the rights offer.

At the time of writing, the Purple Group share price traded at R0.90 per share. It means that shareholders who exercised their rights made a significant loss.

Selling versus holding on

Daily Investor created two hypothetical investors who owned 1,000 purple group shares at the time of the rights offer announcement.

Investor 1 sold his Purple Group shares, whereas Investor 2 held on to his shares and exercised his rights.

Investor 1 gained R1,290 in proceeds at the share price of R1.29 after selling his shares.

Investor 2 received 102 rights which he exercised at a share price of R0.81, thereby investing an additional R82.67. His total initial investment value is, therefore, R1,372.67 (R1,290 + R82,67).

At the current share price after the concluding rights offer period, Investor 2’s total investment value is R991.85 at a share price of R0.90.

This indicates that the investor who exercised his rights has lost 28% of his investment value since the rights offer was announced.

Purple Group Investor 1 (sold) Investor 2  (held on)
Investment value at rights announcement R1,290.00 R1,290.00
Proceeds from sale R1,290.00 No sale  
Additional investment No investment R82.67
Total initial investment R1,290.00 R1,372.67
Wealth today R1,290.00 R991.85
Wealth lost Zero R380.82