Afternoon:
9°c
Royal Bank of Scotland's share price sagged to 250p yesterday, and suddenly the 200p rights issue price it has set to raise £11 billion of new capital is not so far away. What started as the deepest of deep-discount rights issues is now only 20% off the current share price.
So the financial penalty for not subscribing to the new shares is much diminished. After a rights issue, the share price falls to the weighted average of the market price and the rights price - the average, in other words, of the relatively expensive old shares and the cheaper new ones.
One reason for a deeply discounted rights issue is to force shareholders to subscribe because it is the only way they can maintain the weighted value of their holding when this price adjustment takes place. But the closer the two prices come together before the new shares have been issued and sold, the less the share price will be dragged down so the less pressure there is on shareholders to subscribe new capital.
This point will not be lost on institutional investors, some of whom are far more strapped for cash then one might expect, and who might welcome the opportunity to get off this particular hook. The big funds don't have a serious problem but many of the smaller ones - particularly the unit trusts - are facing a rush of redemptions as their customers seek to withdraw their money. They would rather save their cash to meet these demands than subscribe to the rights issue.
This obviously increases the chances that the issue will fail - or, to use the more polite term, be undersubscribed. It is not too much of a problem for the company, because the underwriters and sub-underwriters would be called upon to buy the new shares the other shareholders did not want. RBS would still get the full £11 billion it needs. But once an issue gets the smell of failure about it, it becomes self-fulfilling and even the underwriters don't subscribe because they fear they are going to be stuffed with the shares anyway.
What we have is the intriguing possibility that the big investment banks underwriting this issue, some of whom have already had to raise emergency funds themselves, could well be left in the uncomfortable position of propping up the rescue of RBS.
Word in the City is that not all the issue has been sub-underwritten - which is the process by which the lead banks lay off the risk like a bookie. As much as 70% is said still to be the sole responsibility of the lead bankers. If true, it means they are exposed to the possibility of having to take on to their own balance sheets shares of RBS to the value of slightly more than £7 billion - just when they thought they were beginning to clear their books.
It is highly unlikely to come to that - at least not in such an extreme form. But it does now look ever more likely that the underwriters will be stuck with something at a time when some of them are in no condition to be stuck with anything.
Garnier goes quietly at Glaxo
The quiet exit of Jean-Pierre Garnier, who retires this week as chief executive of GlaxoSmithKline, contrasts rather starkly with the noise that surrounded significant moments in his reign.
Seldom, for example, has one man's pay package caused such a fuss as Garnier's did in 2003 when it became the focal point of institutional shareholder campaigns against contracts longer than a year for chief executives. Shareholders were at the time seeking ways to restrict "rewards for failure", and a two-year contract would have given Garnier severance pay of £22 million had he subsequently been fired.
They were so incensed that more than 50% voted against the adoption of Glaxo's remuneration report, the first such reverse for a major company. It required almost a year of quiet behind-the-scenes diplomacy by the then chairman, Sir Christopher Hogg, to defuse the issue, mend fences with shareholders and forestall a re-run the following year.
When he took the helm in 2000, Garnier's main task was to see through and bring out the benefits of Glaxo's merger with US drugs company Smith Kline. History will show better than we are able to do today how successful that has been. But it is surely extraordinary that a world-leading business like Glaxo, in an industry that is at the fore-front of applied science and modern technology, should have had such a dismal share-price performance.
Some 11 years ago, when it was trading as Glaxo Wellcome, the shares stood at a high of £23. Today, despite the company having made very few apparent mistakes on Garnier's watch, they are at a little over £11.
