Trombone Rights Issues
A trombone rights issue was first used in relation to the Dixons acquisition of Cyclops in 1987 and it has now become an established method of financing a bid for another company. In the context of a bid, a traditional rights issue suffers from the disadvantage that the issuer will receive the full amount of cash needed to finance the bid but may not in fact need that cash if the bid proves to be unsuccessful.In a typical trombone rights issue there is an issue of convertible loan stock which is in two parts, the first instalment being unconditional and the second being conditional on the success of the bid.
The first instalment is payable at the end of the offer period (as in a normal rights issue) and the second instalment is payable only if and when the bid becomes unconditional. If the bid does not succeed the unpaid stock is cancelledThe reasoning behind the issue of loan stock rather than shares is that cancellation of nil- or partly-paid shares amounts to a formal reduction of capital which must be approved by the court in accordance with the Companies Act 1985, s 135 but no such formality is imposed in respect of the cancellation of unpaid loan stock.
Another reason for using convertible loan stock is that the Stock Exchange normally refuses to permit shares to be admitted to listing whilst the issue remains subject to conditions, although there have been exceptions to this general rule.Another variant on a rights issue is an open offer which is a form of offer sanctioned by The Listing Rules. Like a rights issue, an open offer is an offer of new securities to existing shareholders in proportion to their existing holdings. It differs from a rights issue in that the minimum offer period is only fifteen business days. Also the offer is not made by means of a renounceable letter and no arrangements are made to sell shares which are not taken up for the benefit of shareholders.
From the company's viewpoint the main advantages of open offers are the shorter offer period (with a corresponding saving in underwriting costs) and the fact that the discount on shares offered by way of an open offer is usually less than the equivalent rights-issue discount would be.
Under The Listing Rules an open offer of equity securities of a class already listed may not be made if the price is to be at a discount of more than 10 per cent to the middle market price of the securities at the time of announcing the terms of the offer, unless the Exchange is satisfied that the issuer is in severe financial difficulties or that there are other exceptional circumstances.
The Companies Act 1985, s 89 must be dis-applied before an open offer can be made. Dis-application resolutions now commonly contain wording authorising open offers (see, for example, the dis-application resolution given earlier in this chapter). Institutional investors have not raised formal objections to the use of open offers, but this is not surprising given that they tend to take up their rights anyway. The categories of investor who may lose out if a company raises capital by means of an open offer rather than a rights issue are smaller and private shareholders, who either lack the resources to take up their rights or who are apathetic.
This is because the structure of an open offer does not permit renunciation of offers; nor is there any requirement for the company to arrange for the sale of the new securities for the benefit of shareholders who take no action themselves in respect of their entitlements.
Open offers are normally combined with a placing. The shares are placed with institutions subject to recall and then offered to the existing shareholders in proportion to their existing holdings.
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