Shares of National Australia Bank Ltd (ASX: NAB) remain stuck in a trading halt.
Prior to the release of its half-yearly results yesterday, NAB shares went into the halt pending an announcement on a capital raising.
To fund a demerger of some of its UK assets and bolster its capital position, it said a 2-for-25 rights issue would raise $5.5 billion through a fully underwritten pro-rata accelerated renounceable entitlement offer – try saying that without taking a breath!
What that means is shareholders on the banks registry at 7pm (Melbourne time) on 12 May 2015 will have the right to buy two shares for every 25 they own, at $28.50 a pop.
Eligible shareholders can also sell their rights, or "entitlements", on the ASX between 12 May 2015 and 25 May 2015. This could incur brokerage costs.
If eligible shareholders don't take up their entitlement or choose to sell, the new shares will be auctioned at a retail shortfall bookbuild on 4 June 2015. Any proceeds in excess of the offer price will be returned to shareholders who didn't exercise their right to buy or sell, less any withholding tax.
If you want to get my opinion on yesterday's results, go here.
Are NAB shares set to fall?
Usually, when a lot of shares are offered at a discount to the prevailing market price, the share price will fall to reflect the offer and preclude investors from make an arbitrage profit (i.e. the act of simultaneously buying and selling an item for a profit).
As I noted yesterday, however, whilst the use of NAB's new capital appears worthwhile from a long-term perspective, the more-often-than-not myopic Mr Market will likely sell-down NAB's shares once they recommence trading on 12 May 2015.
What should you do?
Since I'm not a shareholder, I can't take part in NAB's offering. However, as with all capital raisings, the question is simple…
If you wouldn't be willing to pay $28.50 for NAB shares on market right now, why would you take part in the offer? If that's you: sell your entitlement on market, or do nothing – personally, I'd choose to sell rather than wait for the retail shortfall auction which may, or may not, result in any meaningful capital return.
On the other hand, if you think $28.50 is a good buy price for NAB shares, why not take up the offer?
Before you make your decision it's important to be aware of what the funds are being used for. Also, in addition to NAB's, take a look at the other big banks reports, here and here, paying particular attention to their outlooks, before making a decision.
Personally, I think the 10% plus share price falls of each of the big banks over the past month says it all: buyer beware.
