Lloyds Rights Issue: Not a Typo, Apparently

A while back now, I thought it would be interesting to monitor the Lloyds rights issue to see whether, as I strongly suspect, the rights issue process itself tends to drive down the share price – temporarily, of course. Or, alternatively, whether the market for UK retail bank shares is deep and liquid enough to prevent a mis-pricing during the issue.

Little did I know what I was letting myself in for. There are rather more side-issues than I’d reckoned on. But I’ve started so I’ll finish. I feel obliged to put the record straight on one or two points.

I’ll write again about the TERP business separately, but first need to clarify the cause of the anomaly in share numbers I attributed yesterday to a typo. I guess when Lloyds based their TERP calculation on the closing price on Monday rather than the average price that day which their Prospectus said they would use, I was ready to assume they’d made other mistakes. On the other hand, the typo assumption does seem natural, given the coincidence of the numbers. Reminiscent, perhaps, of George Monbiot’s famous deduction of the erroneousness of David Bellamy’s claims about claims about [sic] advancing glaciers.

To recap, I noticed yesterday that the numbers in Lloyds Rights Issue Price Announcement don’t stack up. Specifically, the document stated the following:

“Basis of Rights Issue 1.34 New Shares for every 1 Existing Ordinary Share [A]

Number of Ordinary Shares in issue as at the date of this announcement 27,161,682,366 [B]

Number of Ordinary Shares to be issued by Lloyds Banking Group pursuant to the Rights Issue 36,505,088,579 [C]”

Naturally, one would expect C to equal A*B. But it doesn’t. In fact, C=1.34399…*B.

The “399” sequence led me to suspect that maybe A should actually be 1.344 and not 1.34, perhaps a reasonably easy “typo” to introduce.

In fact, I’ve been advised (and in the best journalistic tradition will not be divulging my source!) that the correct explanation is entirely different.

Attentive readers will recollect from one of my earlier posts on the subject that there are a few limited voting rights shares in Lloyds. This is what I said:

“Second, there are a small number of Limited Voting (LV) shares – 79 million, compared to over 27bn – in fact ~27,162 million – Ordinary Shares. These LV shares also have an entitlement to rights. What I don’t know, though, is how much these LV shares are worth. If each is worth much more than an Ordinary Share, and, more to the point, if the holder of each contributes significantly more than 50p to the rights issue, then the rest of us would have to put in a bit less than 50p.”

At the time I thought perhaps the LV shareholders might contribute some of the £13.5bn being raised in the rights issue. It did not even remotely occur to me that the LV shareholders might be entitled to rights to buy Ordinary (i.e. full voting) Shares. This seems to me entirely illogical – you’d think they’d get more LV shares instead – but is in fact the case.

Lloyds’ Prospectus notes that:

“Number of Limited Voting Shares in issue as at the date of this document 78,947,368 [D]

Number of Limited Voting Shares to be issued pursuant to the LVS Capitalisation Issue 1,973,683 [E]”

And this is what the Prospectus has to say about the Capitalisation Issue (the award of additional shares to existing shareholders, similar to a scrip dividend, though feel free to shout me down on this) in the Glossary:

“LVS Capitalisation Issue: the proposed issue of new Limited Voting Shares pursuant to Article 122 of the Articles”

My dedication to the task has reached its limits. At least until I get a second wind, I will not be trying to find “Article 122 of the Articles”. (Isn’t this legalese gone mad? Shouldn’t that just be “Article 122”? Or next time I tell someone my address should I say “number 47 of the numbers”?).

Anyway, if you add D + E to B and then multiply by A, you do indeed get C, to the nearest share.

I mentioned the possibility of rounding yesterday, i.e. that shareholders would not in general be entitled to a whole number of rights. I presume, since no allowance is being made for this, that such rights are being created and will be sold in the market. Perhaps shareholders will receive a small amount for the sale of part of a right they were entitled to; perhaps they won’t. I’ll let you know if I find out.

I hope that clears the typo issue up. Sorry, Lloyds, though I still think you calculated the TERP differently to how you said you would, and indeed, as I’ll explain next time, I still think you’ve taken liberties with the TERP concept. As I said before, and will elaborate, the one true TERP is that based on the closing price just before the shares go ex-rights, that is, on tomorrow’s closing price.

And if that isn’t a teaser for the next post, I don’t know what is!