With the Rights Offering, how do they transfer shares on June 3rd, do they automatically do it, and/or do they force a shareholder to sell, and buy back after new offering? Any clarification would be appreciated. Thanks.
it's just a secondary offering - they are trying to raise $63 million in newly issued shares starting at the beginning of June. The new shares will be usually priced at a huge discount to the current share price to attract investors to buy additional shares. I'll do some back on the envelope math on this for you later. Additionally they are granting existing shareholders a right to buy new shares at the determined discounted exercise price.
just as an example:
the offering price of the new shares will be determined at $3.15 (which would lead to the issuance of 20 million new shares) - this would imply that for every two shares of old stock (as the current sharecount is around 40 million) you would get a right to buy one discounted new stock. There will be an "ex-day" when the right gets stripped out of the common share and gets a short lived listing for itself. Assumed the share price will be $4.15 at this time your right would have a theoretical value of $1. If you don't want to buy additional shares in the offering you can just sell your rights as they will be exchange traded for a short timeframe.
the whole offering is backstopped by the company's major shareholders which will buy all shares the company won't be able to sell to the public. So what will happen is mostly a question of price determination by the company. If they offer the new shares at no discount or even with a premium this would lead to no one buying the new shares with the major shareholders ending up with buying the whole offering. You can bet this won't happen as otherwise they could have just done this as an equity infusion without any participation of the outside shareholders. So expect a heavily discounted offering price and the stock to take a giant hit next week as hedge funds will use this excellent arbitrage scenario to short the shares and pick up cheap rights just to cover their short position with the discounted new shares.
Thanks hagen, I think I am understanding it more, have been Googling it on different sites.
They will offer me shares to buy at the discounted price to shareholders on June 3rd. How do we notify them if we want to buy the additional shares?
Yes, it dilutes shares, but if they are also buy back shares, couldn't they continue to buy back the shares that were diluted? It may take a while, but eventually they could buy back all additional shares. Their current stock buyback program is 4 million, correct?
so there's a huge incentive for institutional investors to bring the share price down next week as the discount will have to be applied to the actual share price. So as an example if they manage to short the stock down to $3.00 the discounted offering price might have to be priced around $2 and they will be able to pocket a giant gain just by using the mechanisms of this type of offering.