What is a rights offering?

The distribution of subscription rights to existing shareholders in proportion to their ownership interest is a rights offering.  The period of time in a rights offering during which a new issue of securities may be bought by investors holding subscription rights is the rights offering period, it commonly lasting 30 to 45 days in the US markets.  Rights are valued separately and trade in the secondary market during the subscription period.

The number of rights per new share required to subscribe to a newly issued share is the subscription ratio.  The required number of rights and the necessary cash must be presented to the issuer in order to buy new shares.

Determining Subscription Ratios (Example)
Desired additional capital stock	€10,000,000
Stock’s current market price per share	€60
Subscription price (83.34% of current)	€50
Current number shares outstanding	4,000,000
Nr. shares to sell (€10,000,000 ÷ €50)	200,000
Rights/share (200,000 ÷ 4,000,000)	1/20
Rights needed to buy 1 new share	20
Subscription ratio	20:01

Rights-on refers to the shares in a rights offering that are trading such that the new buyers of the shares receive the associated subscription rights that have been declared but not yet distributed.  Ex-rights refers to the shares in a rights offering that have begun to trade without the new buyers of the shares receiving the associated subscription rights, which occurs as soon as the rights are distributed.  Once shares trade ex-rights they are worth less.

The theoretical value of rights is the value of a subscription right after announcement of a right offering but before the right expires.  As with all options on stock, it is affected by interest rates, the price, dividends and volatility of the underlying stock, the right’s strike price and time to expiration.  The equation for calculating the value of a right is:

Value of a Right = 1 + [(Stock Price − Subscription Price per Share)/Nr. Required Rights]

The theoretical ex-rights price (TERP) of a share is the estimated value of a share of the issuer’s stock immediately after a rights offering, on the ex-rights date:

TERP = (Market Cap Prior to Rights Offering + Rights Offering Proceeds)/Nr. Shares Outstanding Ex-Rights

A rights offering calls for an adjustment to the company’s earnings per share (EPS), since the exercise price for the new shares is typically set below the market price.  Moreover, a rights offering spreads the earnings of the company over more shares, which decreases the earnings per share as a result of the share dilution.