Rights and Numbers

Woolworths are going to trade ex the rights on Monday. What does that mean? Well, it is pretty simple. Let us say that you bought the shares today at 80 Rand, that would be a value (if you bought 100) of 8000 Rand. On Monday the stock trades ex the rights (of 22 per 100), but equally the rights become tradable in the open market in due course.

Monday rolls around and you get 22 rights. The share price will adjust accordingly, because there will be all these new shares in issue. Simple math, the 22 rights at 59.5 Rand equals 1309 Rand. If you simply calculate the new value (9309 Rand) divided by the number of shares in issue (122 now) you get to an average price of 76.30 Rand.

But wait, there is more, to borrow a line from the grand telemarketing adverts of yesteryear. Woolworths are also trading ex the dividend on Monday, remembering from the time when we covered the stock in their results Woolworths, Turn down for What! that the stock will be trading ex their dividend too. Ex 150.5 cents (or 127.925 cents after tax).

Minus that from the 76.30 and you get to 74.80 Rand. What I have tried to explain to many people is that there is no arbitrage gap, i.e. if you buy them today, you are not somehow getting something for free, the market is too efficient for that, everyone has done the math. There is no secret that is unknown to the market. Woolworths have indicated a number of days ago about the rights issue, the market possibly did not expect the deep discount, but obviously needed to be enticed by the lower price. So more shares in issue = greater dilution on future earnings, the company is pretty upbeat about their prospects.

Having spoken to many clients who own the shares and who are the customers of the company too (present company included) there is absolutely no doubting the quality of the merchandise. As with most things in life, what you pay and what you get are closely aligned. To end off with and to summarise, there is not arbitrage gap, the price will fall, the market will settle at the right price. I think that is right, we will keep you updated as the process goes along.