I hold the view that the KCB Rights transaction advisors are giving KCB a raw deal because of the following:

Price: The Ksh 17 per right is on the higher side considering the dilutional effect the 2:5 rights will have on the overall shareholding.

The Mathematics of the rights issue:
Each share last year made Ksh 2.05 for 2.217M shares.

After the rights, each share will have an EPS of Ksh 1.46. As such, each new share is being sold at a P/E of about 11.5

The rights in my opinion should have been sold at a P/E of 10, thus an offer price of Ksh 14.50.

The initial plan seemed to have been to issue 1.1B shares to be offered at 1:2 ratio at a price of about Ksh 14. When the regulator reduced the shares to be offered to 887M, the advisors seem to have simply retained the target of Ksh 15B and raised the offer price to Ksh 17.In my opinion, the target amount should have been reduced to about 13B.

Assume a person with 5 KCB shares before the shares went ex-rights. At a market price of Ksh 20.5 X 5 = Ksh 102.50
Add 2 right shares @ Ksh 17 = Ksh 34
Total value of his 7 shares is Ksh 136.50
Thus Per share, a cost of Ksh 19.50;and a current P/E of 13.35, forward P/E (10% growth for 2010) of 12.2.
I expect the share post rights to trade at the Ksh 17.5 to Ksh 18.5 range before gradually moving to the Ksh 20 range as excess liquidity is mopped up.

The GoK
With the GoK not taking up its right, it means the other shareholders have to step forward an bring Ksh 3.45B that the GoK was supposed to pay for its 23% shareholding. This effectively devalues the right options of other shareholders (tradeable in the NSE). Why buy the other shareholders rights priviledges for maybe Ksh 1.50 (Ex rights price of Ksh 18.5 - Rights price of Ksh 17) when the GoK's 200M rights have no takers.
The outcome is that, during the rights, the KCB share is effectively worth Ksh 17 since the rights priviledges approach a value of Ksh 0 (a case of excessive supply of rights). Worst case scenario would be the share price falling to below Ksh 17 , a real possibility because of the poor timing as highlighted below.

Timing
How do you plan the largest rights issue in Kenyas history to run a few days before an election (Referendum)? This poor timing may just push the share to below the rights issue price, seriously jeopardising the success of the rights issue. In my opinion, the rights should have been offered at the end of August to milk the euphoric mood (especially if the Yes prevails)

Why a rights issue and not a bond?

With the GoK paper falling below the inflation rate, a well priced bond would have a very good chance of success. Am not an expert on bonds but my hunch is this may have been a better path to raise all the 21B in 3 tranches of say Ksh 7B spread over time.

I stand to be corrected, but am eyeing this share at the Ksh 15-16 range. As mentioned above, with the govt staying out of the rights, applying for the GoK allocation is equivalent to obtaining the KCB share at Ksh 17 without having to pay for the rights priviledges at the NSE.

Happy hunting.

@stockmaster, I think you are wrong on the pricing of the shares as having the number of shares reduced from 1.1bn to 887m effectively meant that the share price should increase if the target quantum (Kes 15bn) is to be realized.

On the Gok's rights, this option is only available to existing shareholders. Any investor who is not an investor in KCB has to purchase the rights in the market and if this happens, then obviously the price of the rights can not be zero. In any case, does the GOK intend to sell the rights or to have the option lapse? If the GOK decides to put its rights in the market, which is the right thing to do, then it is possible that the price could approach zero if investors decide to shun KCB.

@ Evolve:
The amount to be raised should be a variable based on the amount of shares to be offered. Lets assume the regulator approved only 550M KCB shares (half of the 1.1B KCB aimed to offer). If the target was to remain unchanged, then it means the rights would have been offered at Ksh 15B/550M = Ksh 27.25.

On the issue of who is eligible for the rights (existing shareholders), all i need to apply for the additional rights is to appear on the shareholders register (which i can with only 100 shares worth approximately Ksh 2,000). I can then apply for whatever amount of the GoK stake i wish.

@ VVS:

I estimate KCB even with the extra Ksh 15B will grow at between 15 - 20% this year. So, the current EPS of KCB is Ksh 1.46 (after factoring the rights dilutional effect), with a projected 2010 EPS of 1.46 X 1.2 = Ksh 1.75. If it then trades at a forward P/E of 12, then the share can hit the Ksh 20-21 range by March 2011 (when Year 2010 results are announced).

Happy hunting

Talking about KCB rights, Last evening i got an alert from CDSC informing me that my account had been directly credited with 12,000 shares of KCB. I currently hold 30,000 shares which translates to a 2:5 ratio, which is clearly the rights ratio.

Question is:-How did this happen and what does it mean since application for the rights issue atarts tomorrow.

Did anybody else get this alert?

May be they meant to write "rights" not "shares"

Agree with stocksmaster on all but one. A bond issue woulda been very expensive. A rights issue was the easiest way to raise capital under the circumstances.

I had a similar discussion with some peers and we were of the consensus that the advisers were not fair to KCB on this one. Furthermore, the advisers do not seem to be moving with the trend looking at their criteria for setting the price of the rights. Without calling into question their credibility, I believe the advisers are made up of a banker, a CPA and a CPS. Why didn't KCB use advisers with more appropriate qualifications e.g. CFAs and actuaries. I'm not saying that SIB are not qualified to act as advisers but it just seems more prudent to have more CFAs and actuaries as advisers for rights issues.

I am not sure how you arrive at the conclusion that a bond would be more expensive given falling the t-bill rates.

Nothing from the rights issue prospectus has convinced me to upgrade my order price Ksh12.
KCB execution has been poor for a while and its noteworthy that none of its branch building outside Kenya is profitable yet.

@VVS, perhaps @Sasha is referring to arrangement fees. Noting that the same still do apply to a rights issue, new instrument+regulatory approval+underwriting costs for bond issue may have been moderately higher. Although NSE set bad precedent when they rejected BBK bond, ostensibly because it did not introduce new money into the country.

But HIGHER for WHO is the question? The stock price that should be at 22/= has found a new 17/=, a difference of 5.00

2,217M shares x -5.00 = 11 billion of market capitalisation lost; eerily close to the 15 billion they would like to raise. Very HIGH cost for ME as a shareholder

Less than 50% means the Rights Issue has 'failed' & refunds will be issued BUT embarrassment + wasted fees to NSE, CMA, brokers, etc...

@VVS, could you respond to my other issues, say if 50% is taken up, i assume the takers will have made a good decision.