An analysis by Daily Investor showed that investing in the JSE Top 40 or the S&P500 produced far better results than forming part of EOH or Purple Group’s rights offers.
A rights offering, also known as a rights issue, is a way for a company to raise money by allowing existing shareholders to buy new shares at a discounted price.
Shareholders have the right, but not the obligation, to buy additional shares. However, unless they exercise their right, they will be diluted.
Companies promote the rights offer as adding value to shareholders because they can buy the new shares at a significant discount.
However, shareholders often lose money when a company announces a rights issue to raise additional funds.
EOH and Purple Group, which raised funds over the last year, are good examples of the impact of rights offers.
In October 2022, EOH announced that it would issue a rights offer raising R500 million. It explained that the funds would be used to improve its financial position by paying off debt.
When the rights offer was announced, EOH traded at R4.28 per share. Shareholders were offered 227 additional shares for every 100 shares held for R1.30 per share.
At the first announcement of the rights offer, the theoretical breakeven price for the share after the rights offer was completed would be R2.20.
This means that an investor who exercised their rights offer would have made no gain or loss if the share price was R2.20 after the completion of the rights offer.
Since the completion of the rights offer, EOH’s share price has fallen to R1.50, well below the R2.20 threshold.
Purple Group also had a rights offer they first announced in May 2023.
The rights offer would collect an additional R105 million from investors, which Purple Group said it needed to accelerate local growth and aid in its international footprint expansion.
The rights offer gave shareholders the right to purchase 10.21 shares for every 100 shares held at R0.81 per share.
Based on the share price on the day after the rights offer announcement was made, the breakeven share price after the rights offer would be R1.18.
At the time of writing, Purple Group’s share price is 92 cents, much less than its theoretical breakeven price.
Daily Investor compared the return for shareholders who exercised their rights or sold their shares and bought a JSE Top 40 or S&P500 ETF.
Both cases were based on an investor having 1,000 shares in the company at the day the rights offer was announced.
It showed it would have been a far better investment to sell the shares when the rights offers were announced and invest the money into the JSE Top 40 or S&P500.
EOH case study
|EOH||EOH investor||Top 40||S&P500|
|Investment value at rights offer announcement||R4,230.00||R4,230.00||R4,230.00|
|Proceeds from sale||R0.00||R4,230.00||R4,230.00|
|Total initial investment||R7,181.00||R4,230.00||R4,230.00|
|Wealth lost/gained since anouncement||-R2,406.80||R793.91||R858.19|
Purple Group case study
|Purple Group||Purple Group||Top 40||S&P500|
|Investment value at rights offer announcement||R1,290.00||R1,290.00||R1,290.00|
|Proceeds from sale||R0.00||R1,290.00||R1,290.00|
|Total initial investment||R1,372.67||R1,290.00||R1,290.00|
|Wealth lost/gained since anouncement||-R358.77||-R32.50||R111.88|