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Corporate Valuation by Laura Zanetti, Gianfranco Gianfrate, Mario Massari

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Chapter 16Valuation Considerations on Rights Issues

16.1 INTRODUCTION TO RIGHTS ISSUES

One of the options available for a publicly listed company willing to raise equity by issuing new shares is to do so by offering preemptive rights to current shareholders. Equity offerings of this kind are commonly referred to as rights issues, due to the fact that existing shareholders are granted rights to subscribe for new shares proportionally to their current stake in the company and can either exercise such rights or sell them to other investors.

The1 price at which new shares are issued (subscription price) is set in advance by the issuer at a significant discount to the reference share price before the announcement of the offering terms. Preemptive rights can only be exercised during a limited time window (subscription period), during which the rights are detached from the shares and trade separately on the same stock exchange. For this reason, the first date of the subscription period is called ex-right date and the share price after detachment of the rights is also referred to as ex-right price (where “ex” stands for excluding). Unexercised rights at the end of the subscription period are often auctioned in a coordinated placement to the market called rump placement.

Investment banks can play an important role in rights issues, particularly as underwriters of the newly issued shares. In this case, the underwriting banks, often organized in a syndicate, guarantee the full proceeds ...

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