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So what do you do with Brait N-Shares?

by , 09 December 2021
So what do you do with Brait N-Shares?
I recently got a mail from Keith asking about Brait's latest rights offer:
“Hi Francois. Hope all is well with you. I have BAT shares, only 545. Now they have some kind of rights offer and I got 1 BATN, lol. I need to make an election, but I don't understand. Currently the BATN is trading around 1000 c. Take up value is 100,000c. Does it mean I can take up the nil share, it gets added to the 545 I have? Or do I have to buy more to reach the 100,000c take up value? I need to make an election by 10th Dec. Could you help me understand this.”

So what is a rights offer? What is a nil paid letter, and what does Keith have to do? If you own Brait shares - you're also facing the same situation. Let me explain…
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What is a rights issue?
A rights issue is an invitation to existing shareholders to buy additional shares in the company at a discount to the market price. Hold on why do I need an invitation? Well this party is not for all, this party is only for shareholders who are holding the shares at a particular date, the Last day to trade Cum rights (LDT).
Shareholders receive a tradable instrument called a right, also referred to as a nil paid letter. That’s because you get this, without having to pay for it.
If you do not own these rights – no discounted shares for you.
What you should also know is that each of these rights or nil paid letters give you the right to a specified number of shares.
Investors that hold these rights, can sell them to others that might want to take up the offer. Or, if you’d like to buy a bigger chunk in the rights offer – you could do so by buying up more of the rights form others that don’t want to take them up.
So what is Brait doing right now?
Brait announced a rights offer to raise R3 billion in capital.
The company isn’t issuing shares under the rights offer but exchangeable bonds with a face value of R1,000 each and a coupon rate (interest) of 5%.
If you are a Brait shareholder, you will receive one right or NPL per 440 shares owned. So in Keith’s case of 545 shares – he gets one NPL. The NPL is indicated by the Brait n-share in his portfolio.
These bonds pay interest on 3 June and 3 December each year and will be repayable on 3 December 2024.
But, where this gets interesting is that the bonds are exchangeable into shares as well.
Effectively you could exchange the R1,000 bond into 228 shares anytime between 31 January 2022 and 27 November 2024.
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What does this mean for shareholders like Keith?
Basically Keith would pay R1,000 to take up one bond under his single NPL/Brait N share.
He will receive 5% interest payments annually on the bond until December 2024.
The exchange price for the bonds to shares is R4.37. That means the R1,000 bond can be exchanged for 228 shares (R1,000 divided by R4.37).
Keith can do this exchange at any time during the above mentioned period.
Why or when would he do that?
Well, at the moment the Brait share price is below R4.37.
So by holding the bonds Keith would at least get his 5% annual interest.
But let’s say early in 2023 Brait recovers as the Covid-pandemic ends and its share price shoots past R5, or R6 for that matter…
So, Keith gets to exchange his R1,000 bond for 228 shares – that are now worth R6 a share. That means he gains around 37% on his initial R1,000 investment. Plus he received interest while waiting to do so.
But what if Brait’s share price doesn’t rise… It only sticks around the R4 level.
In that case Keith wouldn’t exchange his bond for Brait shares. He would stick to receiving the 5% annual interest – with less risk of losing capital.
Essentially this gives you the option to get Brait shares at R4.37 somewhere in the next three years – even if the share price rises. And if it doesn’t – you get paid interest for borrowing the company money.
Alternatively – the BATN share is now worth R14.50 – so it could be sold at this price. But if you own only one or two – the brokerage costs will not be worth it. If you don’t want to buy the bonds – you simply do nothing. The rights will lapse and disappear from your account.
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So what do you do with Brait N-Shares?
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