Sabadell (SAB SM) for TSB Banking (TSB LN)
Sabadell oversubscription right arbitrage (SAB/D SM)
PDF attached
28 March, Sabadell launched their capital raising exercise to part fund the TSB acquisition.
Eur1.6 billion capital increase underwritten by Goldman Sachs to maintain Common Equity Tier 1 capital ratio
The TSB offer is not conditional on the Rights Issue. Sabadell is issuing new shares at Eur1.48 per share in a proportion of 3 new shares for each 11 old ones
There is an interesting new feature with regards to the over subscription rights however which have an impact on the potential over subscription right arbitrage.
The Sabadell over subscription mechanics are:
1- The shares not taken up by the subscription of the rights will be allocated proportionally to shareholders who fully executed their rights and investors who bought rights in the market and fully executed them
2- The additional shares will be distributed proportionally among them prorated according to the % of the new shares acquired during the subscription period over the new shares issued.
Sabadell is changing the way Spanish oversubscription mechanics normally work. Full details are in their rights document Page 35 paragraph 5.1.33 (a).
They are trying to avoid a case where an investor who only acquired 1 share during the subscription period could ask for 100,000 shares and an investor who acquired 100 shares and asked for 1,000 extra shares did not get all of them because the investor who asked for 100,000 shares pushed him out.
Our calculations indicate that at present, the oversubscription arbitrage pays off only if we receive a minimum of 8% oversubscription allocation, which looks high in our view.
Under the Sabadell way of pro-rating oversubscription requests (which is not the way Spanish rights normally work), we believe there is a larger probability of receiving a fairer allocation but experience shows that an oversubscription allocation north of c4% may be hard to get
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