Capital Raising - The Effect Upon Share Price

What happens to a share price when a company goes to the market to raise additional capital?

Example

In April 2007 Lihir Gold (LGL) announced that it was seeking to raise almost $1 billion dollars from the market (institutions and retail). Its share price at the close, prior to the announcement was $3.36. The reason for the restructuring was that LGL wanted to close out it's gold hedge book, and repay their gold loan and other debt. This financial restructuring would allow the company greater exposure to the gold price. 

Some of the money raised was from institutions at $2.80, however retail shareholders were offered a 1 for 3 offer at $2.30. That means those individuals who owned LHG shares prior to the trading halt would have the right to buy 1 LHG share for every 3 LHG shares they own, at the lower $2.30 price.

Those retail investors who chose not to participate in the 3:1 retail subscriber offer would have seen the value of their shares fall dramatically.

Theoretical Effect of the 3:1 Offer Upon the Share Price: Analysis

LHG shares were placed in suspension from Tuesday 17th April 2007 until the $1 billion raising was completed by the close of business Friday 20th April 2007. The closing price on Tuesday was $3.36.

If the investor had chosen to take up the 3:1 issue, then the theoretical value of the shares would change as follows:

Lets assume you held 3000 LHG shares, and therefore you have been offered the opportunity to buy 1000 more at $2.30

• 3000 LHG shares at $3.36 = $10,080
• Offered 1000 new LHG shares @ $2.30 = $2,300

Total shareholding of LHG will be 4,000 shares
Total Value of 4,000 LHG shares $12,380
Theoretical value $3.095 ($12,380/4,000)

Theoretcial Value Vs Resumed Trade Value

When LGL resumed trading on the 20th April 2007 from suspension,  the traded share price closed at $3.06, below the theoretical value price of $3.095. 

The difference between the ASX-traded share price of LGL and the theoretical value calculated above could be for the following reasons.

The retail dilution didn't take into consideration the institutional component of the rights issue at the price of $2.80 per share - which was very handsome. This opportunistic value for institutions is a common practice. Additionally, as the shares had been held in suspension from the 17th April 2007 they had not able to reflect any gold price movement. Finally, after such large one-off fundamental changes to a share price, the market can sometimes build in a temporary higher-risk profile to the stock. In this case, the market might perceive that LGL's full exposure to the gold price movement as either more or less riskier.