“Rights issue” is not a term shareholders like to hear, mainly because it creates a Catch-22 dilemma for them.
The stats of recapitalisation rights issues over the past 10 years show that the average size of an issue is 48.8% of the market capitalisation of the issuing company. The highest was Lonmin, at 97.9%, and the lowest Capitec, at 12.3%. The issue price discount to the theoretical ex-rights price on average was 23.9%. However, if you take the few issues that have taken place since 2019, the average discount to the Terp is closer to 30%.
Rights issues are undertaken to raise capital for a number of possible reasons. Funding development spend or acquisitions is one, but often it’s about restructuring a debt-laden balance sheet. In EOH’s case, our goal is to restructure our balance sheet to settle debts incurred by the previous management so we can focus on investing in future growth.
But one needs to be sure that the underlying business is operating efficiently and is capable of generating acceptable returns. Plugging a hole in a balance sheet without fixing the operations is not a winning strategy. It is for this reason that the EOH board waited until now to launch the offer.