Question 3

Spanish Bank Santander agreed to bail out the ailing Spanish Bank Spanish Banco Popular in July 2017 and announced that they would be conducting a rights issue to plug the debt hole in the latters balance sheet.

(a) Outline the key features of a rights issue

(b) Santander offered 1 new share for each existing 4 shares held at 300p. The existing shares traded at 425p

(i) Calculate the ex-rights price

(ii) Calculate the value of a right of a new share

(iii) Calculate the value of a right of an old share

(iv) Calculate the amount a holder of 2000 worth of shares could receive if the rights were sold

(c) UK shareholders won't be able to subscribe to the rights issue, however, because of the way their investments are held. This is because most British shareholders, whose shares in Abbey National and Alliance & Leicester became Santander shares after the two banks were taken over by the Spanish giant, hold shares in the form of what is known as CREST Depository Interests (CDI). As a consequence, investors will find their shareholding is diluted by the rights issue as they will hold a smaller chunk of the company. However, Santander is going to sell their rights and send them cash instead.

Show that although UK Santander shareholders will suffer a dilution of control, their wealth is unaffected if the right is taken up or sold.

(d) Some shareholders decided to use the proceeds of the rights to buy shares in other companies to diversify their portfolio. Outline the different methods which companies can use to list and raise capital in an IPO.