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.
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.
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.
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!
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