What is an Open Offer in the context of stocks and shares?

Question

One of the companies I own shares in has just announced an Open Offer, giving me the opportunity to buy additional shares.

What exactly is an Open Offer, how does it relate to a Rights Issue and how to I stand to gain from it as a private investor?

Answer 1

In a Rights Issue, you get granted rights to buy shares, but those rights can transferred if you choose not to exercise them yourself. So for example if you owned 10 shares that were worth £5 each, a Rights Issue might grant you rights on 5 more shares at £3 each. You could either exercise those rights, spending £15 and thus maintaining your ownership share of the company, or you might sell them. They would have value because the shares are being offered at a discount to their true value; in this case the value of all the shares after the Rights Issue should be £65 (previous value of £50 + another £15 injected)/15 (total number of new shares) = £4.33, so the rights should be worth 5x(£4.33-£3) = £6.66. This compensates you for the loss in value of your original shares, which will drop to 10x£4.33 = £43.33 after the Rights Issue.

In an Open Offer, you can also buy the extra shares at a discount, but you can't sell the right to do so to anyone else, so you have to fork out the £15 or lose the £6.66.

Note that I'm not certain if the actual price of the rights follows the calculation I used above, as there are other complications such as underwriting where some other institution promises to buy any shares that noone else wants, but it should at least give the general idea.