FOOL'S EYE VIEW
What to Do With the BT Rights Issue

By Christopher Spink
May 11, 2001

Nearly 2 million people hold shares in BT (LSE: BT.A). If you're one of them you will soon receive extensive information about the company's rights issue. This one, the largest ever, should raise a staggering £5.9 billion to help pay off the telecom company's debts. Most shareholders will never have had to deal with such an exercise before. So what should you do?

Don't get flummoxed by the process. At first sight the 111-page prospectus and accompanying eight-page flyer may seem overwhelming. The information, full of complex financial jargon, will certainly look daunting. But you only have a few simple decisions to make. First things first: what's on offer?

The basic deal

Basically, for every ten BT shares you own you have the right (hence "rights issue") to buy three more shares at a bargain price of 300p each. This is 47% lower than the price at which the shares traded, 568.5p, when the issue was announced last Thursday morning.

This leaves you with three choices:

i) Take up all these rights in full
ii) Do nothing
iii) Take up some of the rights

Taking up your rights in full

Say you own 100 BT shares. That means you have the right to buy 30 further shares in the company. These will cost you 300p each, meaning you will have to pay £90. Ta-dah! You must do this and return your letter by 9:30am on 15 June.

Hang around. Why would you want to splash out to take up your rights? What's in it for you? Perhaps you think you could use your £90 better elsewhere. Maybe you don't have enough spare cash floating around. The simple answer is: if you don't take up your rights in full then your stake in the company will be diluted.

Let me explain. If the full amount of money is raised then there will be 30% more BT shares in existence than there were beforehand. And if you haven't bought any at the discount price, your share of the company will be 10/13ths, or 77%, of what it used to be. Taking up your rights in full will mean that you own the same proportion of BT as you did before.

Not taking up any rights

Before rushing off to fill in your form for more shares, though, consider this. If you do nothing, and effectively opt out of the rights issue, you won't be left empty-handed. Yes your stake will be 77% of what it used to be, but your rights to the 300p shares hold substantial value. Why?

Well these rights allow people to buy BT shares at a discount, as we've already explained. Once all is done and dusted, BT shares should trade at between 400p and 500p. This is lower than the present price, because the rights issue means there will be 30% more BT shares in circulation.

However, that is higher than the discounted shares in the rights issue, priced at 300p. That means the rights are worth between 100p and 200p: the difference between the price of the shares already in the market and the price of the discounted shares. Quite simply, the rights save their owner between 100p and 200p on every share, so you could reasonably expect to sell those rights for the same amount -- and indeed you can.

If you opt out, BT will try to sell your rights, through its own broker, to other investors. You receive any proceeds as a cheque by mid-July.

So if you have 100 shares and decide to do nothing, then your rights to 30 further 300p shares will be sold for between 100p and 200p each and you will get a cheque from BT for a sum somewhere between £30 and £60.

That "free cash" might sound fantastic. But remember that your stake in BT will have been reduced to 77% what it used to be. You have effectively sold 23% of your holding and that means any future dividends or capital gains will be lower than they otherwise would have been. That also applies to future losses, of course!

Taking up some of your rights

Say you only have a little spare cash: not enough to buy up all your rights. Rather than forgo all your rights, you may find a broker willing to sell some of your rights and allow you to use the rest to buy your remaining entitlement of shares at 300p. You could even sell some of your rights to purchase the remaining ones with the proceeds.

This sounds more complicated. And it will require a little more effort to work out exactly what you can afford.

For example: if you have 100 shares and have only £45 to spare, then you may want to take up only half your allocation, i.e. 15 shares, which will cost you £45 (15 times 300p). But remember the remaining rights can be sold for as much as 200p each, so you could sell these to increase the number of discounted shares you can afford.

Because of these complications you will have to return your form earlier, by 3pm on 12th June.

What should you do?

This all depends on how you view the future of BT. If you consider its prospects rosy, then you should retain your stake in the company by taking up your rights in full. But if you are not happy about the company's recent results and decision to scrap this year's dividend payments, then perhaps you should reassess your holding in BT. Maybe you should let your rights lapse, effectively reducing your stake in the company.

Here are some recent comments on BT's recent performance and strategy for the future:

BT wants your cash;
BT results show falling margins;
BT answers questions.

P.S.

Only shareholders who owned BT shares on May 9th will get the documentation from BT. If you own the shares via a broker (nominee account), chase him up as he will have the necessary forms about your rights. If you bought the shares after May 9th, then check with the organisation that arranged the purchase about your rights. If you buy BT shares before 21st May you qualify for the rights as well, but you'll have to get hold of the documentation yourself -- BT won't send it to you automatically.

Where Next?

BT website

BT Helpline 0808 100 4141

Rights Issues Explained

BT discussion board  including this comment from Barlogan: "How do I persuade my wife to put money into a share heading down, now it's quit paying her a dividend?!!"