Polliesdividend

What to do with the Rights of Bayer AG?

Rights of Bayer AG.

This week I received 12 Rights (in Dutch: Claim Emissies) from my Bayer Stocks.  So for every Bayer stock I own, I got 1 Right. I can acquire 2 new shares of Bayer for every 23 Rights I own. Bayer gives me the opportunity to buy the new shares for € 81 euro. So I will be able to buy new shares with a big discount. If we look at the closing price of last Wednesday (€98.95), it is a discount of 18.14% Well this is nice.

Okay, I always love a share with a discount! But is this the right discount for me? Before answering this question, first let’s see what Bayer is intended to do with this new money and what Rights are exactly.

 

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For more information about Bayer, read my stock analysis Pollie-style of Bayer AG. On the basis of this analysis, I bought 12 shares in the beginning of this year. For more information about my buy, just take a look at my post about it.

 

Why does Bayer needs new capital?

In simple words; Bayer needs money to pay for the take over of Monsanto. Or as Bayer stated on their website

The company intends to use the net proceeds from this transaction and the bond issues to repay amounts drawn under the syndicated loan facilities agreement for the acquisition of Monsanto.”

With the take over of Monsanto, Bayer makes his largest acquisition in the company’s history. Or as Werner Baumann, Chairman of the Board of Management of Bayer AG says:

The acquisition of Monsanto is a strategic milestone in strengthening our portfolio of leading businesses in health and nutrition. We will double the size of our agriculture business and create a leading innovation engine in agriculture, positioning us to better serve our customers and unlock the long-term growth potential in the sector

In order to acquire Monsanto, Bayer secured initial bridge financing of 57 billion U.S. dollars. As announced in September 2016, this is being refinanced by a combination of equity and debt transactions, some of which have already been completed. The final equity measure will be a rights issue, which was announced this week.

 

What are Rights?

The Rights give a (tradable) right to buy shares at a certain price. The advantage of a rights issue is that every shareholder (and only shareholders) gets the chance to participate.This prevents dilution of the current share ownership, while the company nevertheless comes up with ‘new money’.

On the day before the two-week trading period begins, a snapshot is made of which shareholder holds how many shares. On this basis, he/she is assigned a number of rights that can be traded from the next trading day.

As with a normal public offering (e.g. IPO), the new shares are placed at a discount in the market in order to increase the chances of success.

You can use your Rights, but you do not have to! If you don’t want extra exposure/shares of the company, then you have the opportunity to sell your shares. Usually there is some sales pressure in the first few days, which depresses the value. But as the two-week period progresses, there are more index trackers and speculators who have to hedge positions, as a result of which the price generally picks up again.

 

But what should I do?

Okay before I can answer this question, I first have to do some math.

This morning (Thursday June 7, 2018) I owned 12 shares of Bayer. Which gives me 12 Rights and when I log in to my broker account, I saw that the Rights had a value of € 1.63 each. So In total I got € 19.56 extra potential cash.

Because the board of directors of Bayer decided that you need 23 Rights to buy 2 new shares, I need to purchase some extra Rights to buy new shares (with a discount). And yes these Rights cost me money. So how much discount is left after I bought these extra Rights. As a spreadsheet freak, I got a twinkling in my eye and immediately started to use excel to calculate if it is worth buying some extra Rights.

Okay I prepared a table in which you can see the average share price for every new share I can buy using my (and some extra) Rights.

 

New

Shares

Rights to

Buy

Rights

Price

Total

Right price

Stock

Price

Total

Cost

Average

Share Price

2 11 1,63 17,93 81,00 179,93 89,97
4 34 1,63 55,42 81,00 379,42 94,86
6 57 1,63 92,91 81,00 578,91 96,49
8 80 1,63 130,40 81,00 778,40 97,30
10 103 1,63 167,89 81,00 977,89 97,79
12 126 1,63 205,38 81,00 1177,38 98,12

 

If we look at the table, you can see that by buying the extra Rights, my initial discount on the share price, is almost gone by 4 or more new shares.

Furthermore, I didn’t take any fees of my broker into account in these calculations. If I will do this, the initial discount will certainly be gone totally.

 

 

Conclusion

On the basis of my calculations, which are presented in a clear table (;-) yes Pollie you really draw up a nice and comprehensive table. Someone has to give me a pat on my back 😀  ), I will pass for this opportunity to buy some extra shares of Bayer.

I do still love the company and I believe that they have a bright future after the take over of Monsanto, but the discount in the share price, together with the Rights price, is to little for me.

So when the two weeks are almost over (around June 17) I will sell my Rights.

What do you think about the Rights of Bayer? Did I do the correct math, or did I miss something? What is your opinion buy/sell?

Thanks for stopping by!

Cheers,

Pollie

Disclaimer: I’m not a registered investment adviser, investment professional, brokerage firm or investment company. Readers are advised that information on the website is issued solely for information purposes and not to be construed as an offer or recommendation to buy, hold, or sell any securities. All information, opinions, and analyses included are based on sources believed to be reliable, but no representation or warranty is made concerning accuracy, correctness, timeliness, or appropriateness. Please consult with an investment professional before investing any of your money.

 

 

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4 thoughts on “What to do with the Rights of Bayer AG?

  1. Mr. Kaskoe

    Hi Pollie,

    Keep in mind you probably have to pay transaction costs when selling your rights. My transaction costs for buying 2 rights at Binck where 10€. For me it was still a good deal, despite this fee. And if you didn’t sell or used your rights before June 14th, according to my informtation Binck will sell them for you and will hold 25% of the revenue for themselves.

    1. Pollie Post author

      Hello Mr Kaskoe, you’re correct, i have to pay a fee of €8 to sell my Rights. And I don’t pay a fee when I used these Rights to get new shares.
      My Broker is Binck and I sold my Rights just before the deadline. I will write a post soon

  2. Financial Shaper

    Hello Pollie

    The capital increase of Bayer to finance the acquisition of Monsanto can be quite interesting for shareholders but I think you are perfectly right to do the math.

    I’ve been a shareholder of Bayer for some years and will participate in the capital increase and also bought some additional rights. To sign/buy 4 shares, in my case according to my calculation the average stock price (including price for rights plus fees) is roughly EUR 92. So you are right, it lowers the discount quite significantly when new subscription rights are acquired.

    The way I am thinking is as follows: although I am a bit sceptical, as Bayer will take on huge debts and a lot of risks, the acquisition should be accreditive to EPS-growth and the dividends should climb quite significanlty, at least in two or three years. Setbacks and disappointments are very likely, but we are talking about two fine companies, both with huge moats and the combined business will be unique and has the potential to be a real cash machine. Scale is not everything but in this case it is so massive. Even when dividends climb “just” by 3 % year by year, it looked attractive to me, the prospect for future dividends kind of “justified” lowering the discount.

    Cheers

    1. Pollie Post author

      They are two great companies. I think they need some time,p to really unlock their combined potential. But the dividend will certainly grow the next few years!

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