Sunday, December 21, 2008

DBS Rights Issue. To subscribe or not?

DBS announced that they will raise $4 billion of capital through a rights issue. Every two shares that a shareholder owns will entitle/her to subscribe for a DBS share at a price of $5.42.

The shares trade ex-rights date will be 29th December 2008 from 9am.

This is not exactly a good time to issue rights, as it sends mixed signals to the investors. Is DBS in dire need for cash that they need to issue rights to shore up capital? Has loans default rate increased?

If you are a DBS shareholder, will you be subscribing to the rights?
If you are holding only 1,000 shares (like myself), you have several options:

A) Buy another 1,000 DBS shares so that you can have 1,000 rights to purchase an additional 1,000 DBS shares @ $5,420 (you will end up with 3,000 DBS shares).

B) Buy 500 rights on the exchange so that you are entitled to buy 1,000 DBS shares @ $5,420 (you will end up with 2,000 DBS shares).

C) Sell away your 500 rights to people interested in purchasing DBS shares @ $5.42 (you will end up with slightly above $1,000 cash but your share in DBS will be diluted and price of DBS will fall more than $1 upon XR).

What will my option be? Very simple, I need to do some guess work and attempt to choose the most economical option. A simple calculation will be as below:

I am willing to purchase DBS in the open market for $8.80 to earn an additional 500 rights. Hence, at the end of the day, I will spend $8,800 (DBS shares) + $5,420 (subscribing to DBS rights shares)= $14,220 (which will end me up with 3,000 DBS shares).

If I were to purchase an additional 1,500 rights in the open market, how much will each right cost to justify my purchase?

By purchasing 1,500 rights, I will also end up with 3,000 DBS shares (including my 500 rights as well). Hence, I will need to spend $5,420 x 2 (to get 2,000 DBS rights shares issue) + cost of 1,500 rights= or lesser than $14,220. Hence each right will be worth buying if it costs less than (14,220-5,420 x 2)/1500 rights= $2.25

However, take note that rights can only be traded after DBS goes XR, or else it will be like trading derivatives.

Personally I might buy an additional DBS lot @ $8.80, sell away my rights above $2.30 and attempt to purchase DBS later @ $5 instead.


dan said...

hi , i was reading ur blog again n n hav some qns. u said tat rights can onli b traded when XR comes out. so am i right to say tat, there would be a new channel for ppl to buy / sell DBS rights?

Sgbluechip said...

Yes, you can trade rights on SGX. It should be DBS.ES.0902.

dan said...

hey, i was tinking, if sae i was to take my entitlement of 500 shares @ 5.42 each. making it 2710(cost price) n with my current lot of 1000, i would reduce my benchmark by quite a bit as well without forking out more money to reduce the benchmark n make full use of this good offering. cos my capital is not as much therefore my theory is to reduce as benchmark without coming out with too much cash. wat do u tink of tis option? would there b ani prob? the onli 1 i forsee is tat i would have 1500 shares. i have to get my broker to sell the 500 for me? n the rest i sell myself online. just my 2cents worth. wat do u tink? feasible?

Sgbluechip said...

All ways are possible as long as you are comfortable. Holding 1500 shares after XR is the same (in terms of percentage you own DBS) as holding 1000 shares now.

Selling 500 shares will be a problem though.

dan said...

oh, i thought my percentage would increase? cos i plan to buy the entitlement if the price of the rights r too low.therefore my % would increase cos i will in actual fact pay for the extra 500 shares($2710) in tat case scenario.

btw, as of 29th Dec,9am, i would be able to sell my rights, am i right? cos i feel rather insecure, cos there was no physical statement as of 23th Dec, saying i m entitled to this special offering, i dun wan to perform a short @ the end of the day without myself knowing.

thx for the advise!

Sgbluechip said...

Trading of rights is between 6-14 Jan.

Anonymous said...

dan, you are right that after the subscription of the rights issue your investment in DBS is higher in % of your total investment (portfolio).

what sgbluechip is refering to is your share as a % of total share base remains the same if you subscribe to the rights issue, if not your shareholder rights will be diluted (lower %).

Anonymous said...

I am new to investing and am at a lost now. I had 2000 DBS shares prior to Dec 31st. Sold them today (Jan 7th). Came home and found the Rights Issue offer documents from DBS... So, I have entitlement for 1000 rights. :-) What can I do now? What are my options? Am I still entitled to the rights? What do I do with the entitlement?

Sgbluechip said...

You can either sell the rights or exercise the rights which allow you to purchase 1000 dbs shares @ $5.42. I suggest the latter.