Rolls-Royce has been a disappointing position for investors this year with shares down 67% But the group is looking to its loyal shareholders, hopefully, for help, seeking to raise billions of money through the issuance of new shares
Sales of the aircraft engine maker have dried up due to a halt in the travel ban Now it is offering existing shareholders the right to buy new shares at a high price compared to the present value in a ‘rights issue’
Cash-strapped companies use rights issues to raise funds in times of crisis by offering new shares to existing shareholders at a lower than market price
Rolls-Royce is asking its 140,000 shareholders to help raise £ 2bn This is a 10-for-3 rights issue, this means for every 3 shares held by an investor he can buy 10 additional actions less expensive
It issues 64 billion new shares – that will more than triple the number of shares and « dilute » a 77% stake if an investor does not participate in the rights issue
The new shares will cost 32p each, or 41pc Discount 4pc to the closing price of 130p on September 30 when the fundraiser is announced It is due to end on November 11 The shares are currently changing hands to 221p
Rolls-Royce is following the path of International Consolidated Airlines, owner of British Airways, which raised € 2.75 billion (£ 2.5 billion) this month at a 36% reduction from its share price
The company’s finances have been severely affected by travel bans in response to the pandemic Sales of civil aircraft engines account for 50% of its revenue Previously it sold 600 engines per year, but it does sell only 250 until the travel industry recovers
Joachim Kotze, of financial data group Morningstar, said Rolls-Royce’s future is very uncertain as it depends on the resumption of long-haul air traffic, which could be in a few years.
« If traffic doesn’t pick up or things get worse, the group could run out of cash again in two years, which is a risk investors need to take into account, » he said
Rolls-Royce needs £ 2bn to bolster finances It has already taken steps to consolidate them and cut 9,000 jobs and tapped markets for £ 1bn via bonds It has also asked for support additional to UK Export Finance, a government agency
Graeme Evans of fund store Interactive Investor said buying all of the new shares on offer at a heavily discounted price would allow investors to protect their initial investment Shareholders have three options:
First, buy the maximum number of shares This means that an investor with 300 shares will hand over £ 320 and end up with 1300 shares They will own the same share of the company as before and be entitled to the same share of dividends
Second, an investor can split the difference and take back some of their new share rights and sell the rest to other willing investors.They could double their number of shares by buying 300 new shares for £ 96, eventually with 600 shares, but hold a lower overall share of the company than before the rights were issued
Third, do nothing and let the rights lapse This will dilute the investor’s share in the company and their right to future dividends
Those who regain all their rights to the shares will have to pledge an additional 50% of their existing stake in the company to the current share price of 221 pence, according to Mr. Kotze
« This is a marked increase and investors who choose to respect their rights must be convinced that the company can return to previous levels of profitability to justify its commitment
« On the other hand, if the shareholders don’t respect their rights, they will be diluted and have no benefit at all – but at least they don’t risk losing additional capital, » he said.
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Rolls-Royce Holdings, rights issue, finance
EbeneMagazine – EN – Rolls-Royce is raising funds with a ‘rights issue’ – should you worry or invest?