Travel operator TUI (TUI) has announced a €1.8 billion fundraising to help reduce a hefty debt pile accumulated during the pandemic.

Known as a ‘rights issue’, the exercise involves shareholders making the decision whether or not to buy discounted shares in the group.

As is the case for most major rights issues, TUI’s fundraise is fully underwritten by banks which will step in to buy any rights not taken up by existing shareholders.

Shareholders must take one of four routes:

- Buy some or all your allocated stock

- Sell all your rights

- Sell some of your rights and potentially use the proceeds to buy some of the cut-price shares (known as ‘tail swallowing’)

- Do nothing

WHY DO COMPANIES UNDERTAKE RIGHTS ISSUES?

Rights issues can be an effective way for companies to raise new money for large acquisitions or strengthen their balance sheet.

The fundraising method was heavily used by companies in the wake of the great financial crisis. Banking group Lloyds (LLOY) undertook a £13.5 billion issue in 2009, for example. More recently EasyJet (EZJ) was one of several firms to use a rights issue to rebuild its balance sheet coming out of the pandemic.

Investors do not always welcome rights issues. Their discounted price tends to pull down the market price of a stock, so shareholders typically take a hit to the value of their investment.

Many companies would argue that is the price to pay to allow their business to grow – and that the longer-term benefits will more than compensate for the short term hit to the value of their shares.

WHAT HAPPENS NEXT IF YOU’RE INVESTED IN A FIRM HOLDING A RIGHTS ISSUE?

You need to ascertain why your investee company is asking for more money. Does the desired cash only provide a quick fix to a financial problem and not a permanent solution?

That is the key question for investors in TUI – will the money raised and the planned €1 billion reduction in its €3.4 billion net debt be sufficient? A portion of the expected €1.75 billion net proceeds from the issue will go towards paying back state aid to the German government.

The travel company hopes the reduction in its borrowings will reduce interest costs by between €80 million and €90 million on an annual basis. This would free up cash to invest for a recovery in demand and to take market share from ailing rivals.

If the rights issue is not a permanent solution, you must consider whether the company can generate the extra cash needed longer term from operations. Or will it have to take more drastic action such as selling assets, borrowing more money or tapping shareholders for additional cash?

FOUR OPTIONS FOR TUI INVESTORS AND THE COMPANY’S RIGHTS ISSUE

1. TAKE UP YOUR RIGHTS

Shareholders are typically offered the right to buy a set number of shares in proportion to the number they already hold. TUI is offering eight new shares at €5.55 each for every three existing TUI share held in the business as of 28 March. The official deadline to subscribe for the new shares is 17 April but for most investment platforms the actual deadline is 12 April.

Listed in Germany, TUI is traded through DIs (depositary interests) on the UK stock market. Each DI represents an entitlement to one TUI share. The subscription price in euros on the rights issue will be converted to sterling after a shareholder has elected to participate. For illustrative purposes we have used the euro/sterling exchange rate at the time of writing, which implies a subscription price of 488p.

For example, someone with 300 TUI shares would have the chance to buy 800 new shares costing £3,904 in total.

2. SELL ALL YOUR RIGHTS

The rights associated with shares in a rights issue can be traded in the market and have an intrinsic value. These are known as nil-paid shares or nil-paid rights.

Shareholders can sell their rights to someone else and receive some money, all without having to sell their existing shares.

In general, most stockbrokers do not have the capability to let you trade the rights online, so you will probably have to place an order over the phone.

To calculate the price at which the shares could trade after a rights issue, analysts seek to calculate something called the TERP or theoretical ex-rights price. This is based on a combination of the value of the existing shares at the share price before the rights issue was announced and the new shares at the subscription price.

In reality the actual share price will also be affected by what motivated the rights issue and the company’s particular circumstances at that time. In TUI’s case this is further complicated by the 30.9% holding of Russian shareholder Alexey Mordashov.

His shares are frozen due to sanctions and he cannot participate in the rights issue. As a result, the number of new shares being issued relative to existing shares is not in the 8:3 ratio you would expect based on the rights issue offer of eight new shares for every three held. We have used TUI’s own calculation of TERP which is €9.23 or 812p in sterling. Mordashov’s shareholding will drop to 10.9% after the rights issue with an effective value transfer to other shareholders.

What if you want to sell your rights? The indicative value would be the difference between the theoretical ex-rights price and the subscription price which is 324p per share in the case of TUI (812p-488p). Someone holding 300 shares would net £2,592 in cash by selling their rights (324p x 800 new shares).

3. SELLING SOME RIGHTS TO PAY FOR THE COST OF SOME NEW SHARES

An alternative is to sell some of the rights to cover the cost of some of the new shares you buy in the rights issue.

Here, you would sell enough of the nil paid rights to take up the balance of your entitlement under the rights issue, using the net proceeds of the sale of the nil paid rights to enable you to do so.

You would be required to make no further investment to take up the balance of your rights.

4. DO NOT TAKE UP THE RIGHTS

You could allow your rights to lapse. If the TUI share price is trading below the offer price of 488p on the subscription deadline, the nil-paid rights would expire worthless.

But if they are trading above 488p then you may receive a cash payment per nil-paid share equivalent to the TUI share price less the offer price.

Timetable

24 March 2023

Publication of this prospectus and the German prospectus

27 March 2023

Subscription offer published

28 March 2023

Subscription period begins; existing shares of the company will be quoted ex-subscription rights on the London Stock Exchange

29 March 2023

Record date for subscription rights entitlements

12 April 2023

Subscription rights cease trading

17 April 2023

Subscription period ends

24 April 2023

Commencement of trading in the new shares

Source: TUI

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