ARC Investments rights offer problem

African Rainbow Capital Investments (ARC Investments) plans to raise R750 million through a rights offer, but there is a problem.

ARC Investments’ share price dropped to well below the rights offer price, which means it makes no sense to buy shares at that price.

The holding company announced it will offer 150 million ordinary shares for R5.00 per rights offer share.

There will be a ratio of 11.06579 rights offer shares for every 100 existing ordinary shares held on the record date for the rights offer – Friday, 1 December 2023.

“The rights offer price represents a 7.32022% discount to the 30-day volume weighted average price of the ordinary shares as of Friday, 10 November 2023,” it said.

However, the share price declined to R4.72 by Friday, 24 November. This means the rights offer shares are no longer offered at a discount.

Shareholders participating in the rights offer will now pay a significant premium for these ordinary shares.

It follows that it makes no sense for investors to exercise their rights and participate in the rights offer.

ARC Investments is in a rare situation where shareholders will be better off not exercising their rights offer.

By not participating in the rights offer, shareholders will make an immediate risk-free gain on their investment.

At the current share price, the ex-rights offer price of ARC Investments that will leave investors in a neutral position is R4.75.

Therefore, at the current share price of R4.72, investors that do not exercise their rights offers would make an immediate gain of 0.59%

Investors exercising their rights would have to contribute additional capital and, at the ex-rights price of R4.75, not make a gain or a loss.

Daily Investor asked ARC Investments what incentive shareholders have to participate in the rights offer, but it preferred not to answer the question.

The table below illustrates why it is better for ARC Investments shareholders to sit out the rights offer at the current share price.

ARC InvestmentsExercises Rights Does not exercise 
 # of sharesValue# of sharesValue
Initial position1,000 R4,730.001,000 R4,730.00
Additional investment111 R553.290 R0  
Total initial investment — R5,283.29 — R4,730.00
Value at ex-rights price1,111 R5,283.291,000 R4,756.90
Gain — 0% — +0.57%