Wednesday 21 February 2018

Tough decisions lie ahead as BoI investors face dilution

Charlie Weston

SHAREHOLDERS in Bank of Ireland have a difficult decision to make in the next while.

Do they pony up large amounts of cash to buy more shares in the bank, or take one of the other options that will see their stake in the bank being further diluted?

It is hard not to feel sympathy for these shareholders, many of whom are retired and bought shares in the hope of supplementing their pensions through dividend income.

The €1.1bn rights issue -- sale of discounted shares to existing shareholders -- comes after a series of disasters for the shareholders.

There is no longer any dividend, and unlikely to be one for another two years.

The share price has fallen to a small fraction of the €18.65 it peaked at in February 2007.

And BoI shareholders have been diluted (seen the value of their stakes diminish) three times lately -- from the Government taking a 15.7pc stake in the bank, from institutions buying €500m worth of shares, and the conversion of the Government's preference shares into ordinary shares.

All of this combines to mean the shareholders have a tough, and expensive, call to make in the next few weeks.

The rights issue is the final part of a complicated four-pronged capital-raising plan to generate €3.56bn in funding. Existing shareholders are being asked to provide €1.1bn of this.

The bank said it would give existing shareholders the chance to buy shares for just 55c each as part of the rights issue.

A rights issue is an offer to people who already own shares in a company to buy more shares at a cheaper price than they are trading in the market.

Bank of Ireland has just under 100,000 small investors, with the average shareholder owning 5,000 shares.

Shareholders will be given the opportunity to buy three new shares for every two they hold.

The Government, through the National Pension Reserve Fund, will separately contribute about €627m to the rights issue. This will bring the total proceeds from the rights issue up to €1.72bn.

With an issue price of 55c, the rights price has been set at a 64pc discount to the closing price last Friday.

A shareholder who owns 1,000 shares will be offered 1,500 shares -- three new shares for every two they own. The cost of taking up these rights for someone with 1,000 shares will be €825 (or 55c multiplied by 1,500 shares).

So, someone with 1,000 shares would have had a stake worth €1,535 based on last Friday's share price, if they fully take up their rights.

If they fully take up their rights they will end up in an economic position broadly unchanged at €1,535.

This assumes the share price falls to 94c, which is what the market expects.

(This 94c price is the Theoretical Ex-Rights Price. TERP is the market capitalisation based on last Friday's closing price, plus the new money to be raised, divided by the total number of shares in issue after the rights issue).

In this case, taking up all your rights will mean writing a cheque for €825 before June 8. There are no other charges.

For someone with 5,000 shares at the moment, the bank will offer them 7,500 new discounted shares under the rights issue. The cost per share is again 55c, meaning this shareholder will have to write a cheque for €4,125 to take up their rights.

If someone has 1,000 shares but decides to sell all of their rights, then they will get a cheque for €591 if they return a completed form by May 31. This again assumes the BoI share price falls to 94c. But by selling all their rights, their stake in the bank will be diluted.

Shareholders who want sell all their rights can either ask Computershare to do this for them at a fixed price of €15, or they can ask a stockbroker to do the transaction.

Shareholders also have the option of taking up some of their rights, and then selling the remaining rights.

Another option is to do nothing and the investment banks helping BoI with the rights issue will try to find investors to acquire their rights.

If these banks, or underwriters, sell the shares for more than the rights issue price of 55c, you will get a cheque for this amount from BoI before June 25.

The size of this cheque will be based on the difference between the TERP price of 94c and 55c multiplied by the number of rights issue shares you have been offered.

However, your rights could be sold for less than 55c or then again they could be sold for a higher amount, it all depends on the performance of the share price in the next few weeks.

Shareholders have been advised to take up all of their rights to buy shares.

The worst thing for shareholders to do would be to let their rights lapse, the so-called "do nothing option" as their rights could end up being sold at a low valuation in the market (i.e. less than 55c), Bloxham's head of research Kevin McConnell said.

Taking up the full rights and buying shares at the discounted price will enable shareholders to retain the same level of ownership as before the rights issue, Oliver Gilvarry of Dolmen Stockbrokers said.

This was the only way to prevent any further dilution to shareholders from the placing of shares by big financial institutions and the National Pensions Reserve Fund.

Ignoring the rights issue and not taking up the discounted shares they are entitled to will leave shareholders further diluted.

Both Mr Gilvarry and Mr McConnell advised shareholders who cannot afford to fully "follow the money" and take up all of their rights to look to a half-way house solution.

This involves selling half of the rights to the discounted shares, and taking up the remainder of the rights.

This option should be cost-neutral, as the cost of selling the rights should be balanced out by the cost of taking up half of their rights.

Mr Gilvarry said: "This is an option usually used by shareholders who have limited funds available and are unable to take up their full entitlement. Such a strategy will minimise the dilution faced by the shareholder and protect the value of their holding."

The bank is unlikely to pay a dividend until September 2012, unless it buys out the Government's preference shares before then.

More information is available for shareholders in the Republic at 1800 930 490.

Irish Independent

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