When I started investing, I found a new security sitting in my account – the perfect example of a rights issue just distributed. I had no idea what it was but the name seemed to point to one of the stocks I owned.
I scrambled for information but was lost about what was happening. What I needed was a great overview of rights issues and a good rights issue example that I could model an effective trading strategy on.
With two decades of experience under my belt, I want to walk you through how to profit from a rights issue, and then an outstanding rights issue example so you don’t let your rights issues expire worthless in your account like I did.
How to Profit From a Rights Issue
There are a number of ways that you can profit from a rights issue, and it’s worth looking over some of those now.
Of course, you could treat the rights issue as if you were just a long term buy and hold investor – exercising your right to purchase shares and then holding and hoping the stock rises – but I’m going to assume that you’re looking at this with the eyes of a special situations investor and give you a few strategies that you can use to maximize profits.
Buying rights issues offered well below the pre-issue share price
The first strategy is to selectively purchase a rights issue when they’re priced well below the initial stock price. When a rights issue is priced really low relative to the initial market price of the shares, the stock price can fall in sympathy close to where the rights can be exercised at.
After the rights are exercised and the event concludes, the share price can rebound to a new equilibrium – lower than the pre-rights issue stock price but higher than the stock price could be exercised at. This would give you a nice short term bump and a great IRR.
Participate in a rights issue where a company is raising equity to retire burdensome debt
Some companies could be performing well if they weren’t drawing in high interest rate debt. In these cases, a company may decide to restructure its balance sheet by shedding the debt load with shareholder money.
Here, if the company announces a rights issue to purchase stock and plans to use the funds to retire debt, you could profit by buying the shares, or rights issue contracts, and then holding the stock as the firm is unshackled.
Once the company sheds a large portion of its high interest debt, it should show much better balance sheet figures, and higher profits – all else being equal. With those improved statistics, the stock would likely be repriced higher in the market.
Participate in rights issues of a cheaply valued company that is raising funds for a new growth initiative
Similarly, sometimes a company will have a promising new opportunity in front of it but won’t have the cash to see the project through. If you can purchase shares in the company cheaply, or the rights issue contracts and then exercise those rights, you could get in on the ground floor before the firm’s business really starts to improve due to the new venture.
Arb opportunity – Buy the stock if it drops after the announcement but before the ex-rights date, then exercise the rights and sell the stock at a profit
I end this section with a scenario that’s very similar to the one I started this section with. Sometimes you’ll find a stock that trades below the rights issue price after the announcement. In these cases, if the gap is wide enough between the stock price and the exercise price, you could purchase the stock (prior to the ex-rights date), exercise your rights, and then immediately sell your new shares at a higher price once the stock rebounds.
An Example of a Great Rights Issue Opportunity
One notable example of special situation investors achieving a large stock return by taking advantage of a rights issue is the case of UniCredit S.p.A. during its January 2012 rights issue.
UniCredit, an Italian banking giant, faced significant financial pressure after the European debt crisis, prompting a massive €7.5 billion rights issue to shore up its capital base. The bank offered new shares at a deep discount — €1.943 per share compared to a pre-announcement stock price of around €6.50 — representing a discount of over 70% to the theoretical ex-rights price (TERP).
UniCredit didn’t have a controlling shareholder, and some major investors (like the Libyan Sovereign Wealth Fund) were restricted from participating due to sanctions or liquidity issues. This created an air pocket of investment interest that would have otherwise propped up the stock.
The large issuance (a 2-for-1 rights offer) and urgency from regulators created a "forced selling" scenario. Many existing shareholders, unwilling or unable to inject more capital, sold their shares or rights, driving the stock price down sharply before and during the rights trading period. In other words, panic erupted that caused the stock to crash.
Special situation investors, such as hedge funds and value-oriented players, recognized the mispricing. The stock fell to as low as €2.50 (including rights) at one point—close to the rights issue price—despite the bank’s underlying value not justifying such a drop.
Seeing value, these special situation practitioners bought either the discounted shares directly or the tradable rights (which traded at a fraction of their intrinsic value, around €0.60-€1.00).
After the rights issue closed on January 27th, 2012, and the market stabilized, UniCredit’s stock began to recover as the panic subsided and the capital injection strengthened its balance sheet. By mid-2012, the stock climbed back toward €4 to €5, and over the next year, it fluctuated higher.
Investors who bought at the lows (e.g., €2.50 to €3.00) or snapped up rights and exercised them at €1.943 could have doubled or tripled their money within months, with returns exceeding 100% to 200% depending on entry and exit timing.
Why It Worked:
- Deep Discount: The steep discount created a wide margin of safety and a compelling arbitrage opportunity between the rights price and the eventual stabilized stock price. The price you pay is often the determining factor in successful investing.
- Forced Selling: Panic and lack of participation from some shareholders depressed the price below intrinsic value, which special situation investors exploited. Fear is often the reason a stock of security sinks. Take advantage of this.
- Short Timeframe: The event-driven nature of the rights issue allowed for quick profits as the market corrected post-issue. Even if you earn a good absolute return, the time it takes to achieve that return can significantly influence your overall performance.
This case is an example of how deeply discounted rights issues can create outsized returns for those willing to act against the mindless herd. While not every rights issue yields such dramatic gains, UniCredit’s 2012 offering stands out for its scale and the market dislocation it triggered, rewarding astute investors handsomely.
How to Spot Great Rights Issue Opportunities
It can be tough to spot rights issues because there are few central authorities that notify investors of special situations.
If you are looking to do it yourself, then you could monitor chat rooms for promising looking deals or opportunities, and then dive into the ones that seem interesting to you. You do need to spend a lot of time digging through forums and reading to uncover them, though.
Likewise, if you scan social media from time to time then you can find mention of some rights offer that is taking place. This takes a fair amount of time, though, since you have to sift through a number of posts to find something relevant.
The best way to find promising rights issues is by signing up for Event Driven Daily’s FREE Morning Brew newsletter, which provides investors just like you with a comprehensive list of all special situations we’ve uncovered over the prior year.
Enter your email address in the box below because you’ll otherwise spend hours each month combing for these events or miss out on the most promising finds.
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