Right, What’s The Issue?

M&S and Metro Bank announced rights issues

Image source: sjgh - Shutterstock

What's going on?

British retailer Marks & Spencer and upstart finance firm Metro Bank both announced plans on Wednesday to issue new shares – and saw their stock prices fall (tweet this).

What does this mean?

Companies looking for cash sometimes create new shares via a “rights issue”. These shares are sold only to existing investors, and at a discount to the current market price. That helps compensate for the shares investors already hold getting “diluted” and becoming worth less – in the same way killjoys water down the jungle juice at a punch party.

Metro Bank needs the extra cash to prop it up after yet more accounting issues – and M&S needs it to take a $1 billion leap into online grocery retail with specialist Ocado. While Metro Bank is also planning to sell new bonds later this year, raising cash by selling new shares is a handy quick fix for both companies.

Why should I care?

For markets: Same demand + greater supply = lower price.

Metro Bank’s stock slid by 27% and M&S’s by 12% on Wednesday. Even before the new shares hit the market, a rights-issuing company’s stock price often drops due to the negative connotations of such a move – which include shaky financial footing and risks surrounding the successful use of the cash raised.

The bigger picture: Power to the people.

There are many other ways for companies to generate cash. While most investors have little input when it comes to a firm borrowing money from banks or spinning off parts of its business, rights issues offer existing shareholders the power to further back the company (or not!) while funding it in a relatively cheap manner, without any interest payable. The idea is that this gives the company the best possible chance of maximizing future returns for those very shareholders who’re taking a hit to the value of their existing shares. And if they don’t like it, they can always sell… albeit perhaps not in ideal circumstances.

Originally posted as part of the Finimize daily email.

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