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Petropavlovsk PLC rights issue explained: why are the shares down 65% and what are the nil-paid rights worth?

Petropavlovsk PLC rights issue explained: why are the shares down 65% and what are the nil-paid rights worth?

If you’re a Petropavlovsk PLC (LON:POG) shareholder, you have noticed the value of your shares fall from around 15p to 5p when markets opened today.

What’s happened?

Yesterday (26 Feb) Petropavlovsk shareholders voted to approve a rights issue, which will raise $235m that will be used to repay some of the firm’s $1bn net debt.

The rights issue is a 157 for 10 issue at 5p per share, which means that for every 10 shares you already own, you have the right to buy 157 newly-issued Petropavlovsk shares at a price of 5p per share.

The reason the existing shares fell in value today is that the nil-paid rights were admitted to trading and the existing shares started to trade ‘ex-rights’ — i.e. buyers of the shares from today do not have the right to buy new shares in the rights issue.

What are my choices?

In a rights issue, you have the right, but not the obligation, to buy new shares. So there are two choices:

1. Take up your rights

If you are happy to put new money into Petropavlovsk in order to maintain the size of your shareholding (as a percentage of the total share count) then you can buy some or all of the shares you are entitled to.

Your have the right to buy 157 new shares at 5p for every 10 Petropavlovsk shares you own. You don’t have to buy the full allocation, however — you can just buy part of it if you wish.

For every right you don’t take up, you will be entitled to receive payment for the value of your ‘nil paid right’ — the unusued right to buy a new share, which someone else can then buy instead.

2. Sell your nil-paid rights

Nil-paid rights are, as the name suggest, rights for which you have not paid. However, these do have a value and if you don’t want to take them up yourself to buy new shares, you can sell them. (This is normally handled automatically by your broker if you don’t take up your nil-paid rights within the specified timeframe — phone and ask them if you’re unsure of the details.)

My calculations suggest that the value of each nil-paid right in this rights issue is approximately 0.6p.

That equates to around 9.4p for each Petropavlovsk share.

[Update 05/03/15: The price value I suggested above for the nil-paid rights was correct in theory and indeed was true in practice on the day the nil-paid rights were admitted to trading, when POG shares were trading at around 5.6p.

However, investors have proved unwilling to pay that much for the nil-paid rights, which are now worth around 0.13p (POG shares are currently trading for around 5.13p).

How it works: Remember, buying a nil-paid right gives you the right to buy a share at the rights issue price, in this case 5p. Therefore while the rights issue is underway, the value of one nil-paid right plus the cost of the rights issue price should equal the current share price.]

Here’s a quick explanation of how I calculated these figures:

Petropavlovsk shares closed at about 15p on the day before the rights issue started.The price of the rights issue shares is 5p.

Value of 10 old shares @ £0.15 = £1.50

Value of 157 new shares @ £0.05 = £7.85

The ex-rights share price is simply the average of the new and old share prices:

Ex-rights share price = (£7.85+£1.50)/167 = £0.056 or 5.6p

The value of each nil-paid right is the difference between the ex-rights price and the rights issue price:

Value of nil-paid rights = 5.6p – 5p = 0.6p per right or 9.4p per Petropavlovsk share (each old share gives rise to 15.7 nil-paid rights)

What next?

If you’re a Petropavlovsk shareholder, you now need to decide whether to take part in the rights issue and buy some new shares, or whether to simply sell your nil-paid rights.

If you don’t take up your rights, most brokers will usually sell your nil-paid rights for you automatically, but it may be worth checking this with your broker, to ensure you don’t miss out.

I hope this is of some use — fell free to leave a comment below if you have any questions.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.