Sounds to me like the difference between your position and Mesaone's isn't over the existence of a "fair value" for the Rights, but of what that value is. FWIW, here is how I calculate that value:
Suppose you owned 1000 shares of BTIM as of 5 Jan 99. You therefore will have given to you free of charge 1000 Rights. You can take these Rights and, along with 50 x $9.75 = $487.50, exchange them for 50 shares of BTIM worth, say $16.25. In addition, you can exercise the Oversubscription Privilege and purchase another 25 to 50 shares of BTIM at the same $9.75 price. The number of shares you can purchase by oversubscribing will depend on what other shareholders ask for, but will certainly be not less than 25 and probably not more than 50 additional shares: say you expect to get 30 more shares.
Then the value of your 1000 Rights to you is the difference $16.25 - $9.75 multiplied by 80 shares, or $520, which when divided by 1000 yields $0.52 per Right. But there is an additional consideration: capital gains taxes. Exercising your Rights incurs no tax liability. But if you sell your Rights, you must pay 20% to 50% of the proceeds to the state and Federal governments, and only what is left over can be used to purchase shares of stock. So to break even selling the Rights and using the proceeds to buy stock, you must multiply the above $0.52 by between 1.25 and 2.00, yielding a fair value for the Rights between $0.65 and $1.04. These numbers will of course vary with your tax situation, the price of the common stock, and your desire to oversubscribe.
There is of course no logical reason to sell-and-buy, as opposed to simply exercising, if you cannot receive a premium above your estimate of fair value. This is because there are expenses (broker's commissions both selling BTIMR and buying BTIM) and additional risk in this two step procedure, since while executing your buy and sell orders the bid price of BTIMR and the ask price of BTIM may change to your disadvantage. |
