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Rights issue back of the matchbox calcs

Let me flesh out the Discovery rights issue a little. First things first, remember that a company has various options when it comes to raising money, they can turn to the debt markets and borrow money, paying it off over time. They can borrow money from the bank, provided that the bank is willing to lend them such a large sum. The last option is to issue more equity, this is what Discovery are doing. A rights issue is simple, you as the shareholder are given the option to follow all the other shareholders in the same ratio.


The reason why you would would want to follow your rights is to be able to keep your shareholding relative to the number of share in issue at the same ratio. Company earnings are divided by the number of share in issue to get earnings per share, one of the simplest fundamental measures of share price relative cheapness. In the case of a rights issue there is a dilutionary impact, more shares in issue against the same earnings. The company is using their higher than normal share price to raise money, in this case Discovery are looking to raise between 4-5 billion Rand against their current market capitalisation of 70 billion Rand.


The price at which they are looking to raise money is 90 Rand a share. If you work backwards a little, 5 billion Rand is 1/14 to 70 billion market cap, that market cap is at 119.5 Rand a share. The money is expected to be raised at 90 Rand however, my mental arithmetic tells me that the company will look to raise money in the ratio of around 2 rights per 21 ordinary shares. My best guess. To see what you are in for, in terms of following your rights, take the current value and multiply it by around 10.5 percent. That is right, I think. More clarity before the 10th of March, in less than two weeks time we will know the quantum and more importantly what the company plans to do with the funds. We will be in touch with all the clients that are shareholders of Discovery in order to prime them for this, we continue to think that the business offers fantastic opportunities.


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