Ann: REH - ASX Announcement Equity Raise, page-53

"I am still however not following this arb profit. Sorry to sound daft but I genuinely don't follow how participating in this equates to minimum $5724 free money come May 5th when the commencement of trading the new shares arrives. Who knows what the trading price will be once this date comes?"

@TaterzPrecious,

It is evident - judging from some of the discussion on this thread, as well as other threads of companies conducting capital raisings - that many investors don't understand the value transition that occurs when a stock resumes trading after a halt in relation to a capital raising involving entitlement offer.

Specifically, that after the capital raising trading halt, shareholders own not only the shares they did before the halt, but also an in-the-money option to buy more shares. It seems that many people are aware of this option, nor how to value it.

In Reece's case, the option value (or, the "arbitrage profit") - at the prevailing share price at the time, i.e., $9.05 - was $5,724.

Interpreted this way: Assuming one held around $30,000 worth of shares (3,315 shares @ $9.05 (which was the prevailing share price at the time of the preceding discussion), one can "lock in" the gain equivalent to the difference between the offer price and the pravailing share price.

Even if one did not have an extra $30,000 to commit to the capital raising, one's financial position is still enhanced by $5,742 because one could sell the 3,315 shares on-market, locking in the then-$9.05 price (to raise $30,000), which one could then use to buy more shares at the offer price of $7.60, resulting in a new shareholding of 3,947 shares which, at that point in time, would be worth $35,574.




I think what might be confusing you is the fact that hat Arb. Profit Option Value is not static; it varies depending on what the prevailing share price is on the day. For example, at the time of writing ($8.70 share price) the arb. profit for someone with a $30,000 shares is $4,342:




I think that where your thinking might be a bit muddled is in thinking that there is value-at-risk in terms of the arb. opportunity because the price on the date that the new stock gets issued is unknown.

That's true, but remember that the May 5th price risk is not confined not only to the exercise of participating in the capital raising. That future price risk exists whether or not you participate in the capital raising, so it is not a relevant consideration in terms of the decision to invest in the capital raising.

Not sure if I've articulated that in a way that makes it clear.

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