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Rights Offering (Issue)



Definition

A Rights Offering (Issue) is a financial term referring to a special invitation extended to existing shareholders of a company, allowing them to purchase additional shares directly, typically at a discounted price, for a specified period. It is a method used by companies to raise equity capital. The rights are often transferable, enabling the rights holder to sell them on the open market.

Phonetic

“Rights Offering (Issue)” is phonetically transcribed as ˈraɪts ˈɔːfərɪŋ (ˈɪʃuː) in the International Phonetic Alphabet (IPA).

Key Takeaways

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  1. It’s an invitation to existing shareholders: A Rights Offering (Issue) is primarily a method by which companies give their existing shareholders the first opportunity to participate in the purchase of new shares. This allows existing investors to maintain their ownership percentage in the company, preventing dilution of their shares.
  2. Price is usually below market value: The shares issued in a Rights Offering are often priced below current market value to incentivize existing shareholders to take up the option. If they choose not to, they have the option to sell their rights on the open market.
  3. Fundraising strategy: Rights Offering is seen as an internal fundraising strategy, used by companies when they need to raise additional capital. Companies might go for a rights offer instead of borrowing, to avoid incurring additional debt.

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Importance

A Rights Offering (Issue) holds significance in the business/finance world as it allows current shareholders in a company to maintain their proportional ownership and inoculates them against dilution when the company decides to issue new shares. This offering essentially provides preferential treatment to existing shareholders, enabling them to purchase additional shares, typically at a discounted price, before they are offered to the public. Moreover, a rights issue can prove advantageous to the company as well, providing it with a cost-effective way to raise new capital without having to rely on external financing and incurring additional debt, which consequently strengthens its balance sheet. Therefore, the concept of a Rights Offering (Issue) serves as a crucial tool in corporate financing and investment strategy.

Explanation

The primary purpose of a Rights Offering (also known as Rights Issue) is to raise additional capital for a company. This is often done when a company is aiming to finance new projects, fund acquisitions, repay debts, or facilitate expansion and growth without taking on further debt or diluting the control of existing shareholders. By issuing Rights Offerings to existing shareholders, companies acknowledge and reward their loyalty by giving them the first right of refusal, thereby minimizing the risk of ownership dilution.In a Rights Offering, the company offers new shares to existing shareholders proportionate to their current shareholding. It essentially allows these shareholders to buy additional shares, often at a discount to the current trading price, before these shares are offered to the public. This practice effectively incentivizes shareholders to maintain their level of investment in the company. It also serves as an attractive proposition to potential investors who may be interested in purchasing the rights from existing shareholders.

Examples

1. J.C. Penney Rights Offering (2017): In September 2017, J.C. Penney Company, Inc. announced it had completed a fully backstopped rights offering in which it issued approximately 92.6 million units form a gross offering proceeds of approximately $85 million. The move was part of an effort to raise funds to repay its debts and reinvent itself in a rapidly changing retail market.2. Rite Aid Rights Offering (2020): To raise capital and advance ongoing transformation, Rite Aid Corporation in 2020 announced that its Board of Directors approved a rights issue. They made a pro-rata common stock rights offering to raise around $700 million to $750 million, with rights to purchase common stock at a subscription price to be determined.3. Hewlett-Packard Rights Offering (2011): Hewlett-Packard had a $10 billion stock repurchase program going in 2010 and announced in 2011 that they would use a portion of that amount for a rights offering instead. The company stated that purchasing stock directly from the market wouldn’t be economical, so their strategy was to offer existing shareholders the right to buy additional shares first. This recapitalization activity increased the company’s flexibility to complete future acquisitions.

Frequently Asked Questions(FAQ)

What is a Rights Offering (Issue)?

A Rights Offering (Issue) is a financial event in which a public company gives its existing shareholders a chance to buy additional shares at a discounted price, before offering them to the public. This is a way for a company to raise additional capital.

How does a Rights Offering (Issue) work?

In a Rights Offering, current shareholders are given rights to purchase more shares. The number of rights needed to purchase a share and the price at which these shares are offered is determined by the company. If shareholders choose not to exercise their rights, they can typically sell them to other investors.

Why would a company issue a Rights Offering?

A company might issue a Rights Offering to raise additional capital without needing to go to third-party investors. It serves as a way to generate funds for the company’s operations, acquisitions, or debt repayments.

Does a Rights Offering dilute the existing shares?

If existing shareholders do not exercise their rights in a Rights Offering, their stake in the company could be diluted. This is because new shares are being created and sold, which increases the total amount of shares outstanding.

How do shareholders participate in a Rights Offering (Issue)?

Shareholders will receive a notification about the Rights Offering, including the details on how many shares they are eligible to buy and at what price. They can then decide to exercise their rights and purchase the additional shares, or sell their rights to someone else.

What is the Rights Offering subscription period?

The subscription period is the specified window of time during which shareholders can choose to buy the additional shares at the discounted price. The company determines the duration of this period.

What happens if I do not exercise my rights in a Rights Offering?

If you opt not to exercise your rights in a Rights Offering, two things can happen. First, you can sell your rights to other investors. Second, if you do nothing and the Rights Offering expires, your rights will be worthless and you may have your ownership stake in the company diluted.

What is a stand-by underwriting agreement in the context of a Rights Offering?

A stand-by underwriting agreement is an arrangement where an underwriter agrees to purchase any shares that are not bought by shareholders during the Rights Offering. This ensures that the company will successfully raise all the intended capital.

Related Finance Terms

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