Block trade
Financial News (c) charts the anatomy of a block
trade as a guide to the process...
Prepare
Knowing when a window will come in the market for a block trade and being prepared for it in advance can be a key to the success of a deal.
ECM bankers often plot windows for potential
accelerated selldowns over the course of a year, whether on behalf of existing
clients or in a bid to win new business.
Some institutions, including Bank of America
Merrill Lynch, Goldman Sachs and UBS, employ a dedicated blocks banker to
prepare for and lead this type of transaction.
Bankers look for a variety of measures to align
when plotting potential windows.
A lock-up agreement preventing the sale of
shares in a company might be in place by its management and selling
shareholders if there has been a recent share sale.
Banks can waive these agreements, as was the
case with a £450 million sale of shares in wealth manager St James’s Place by
Bank of America Merrill Lynch last May. This tactic can, however, rile some
investors.
Knowing the trigger price for the sale of a
position by a shareholder is also important. Private equity firms will often
watch for the shares of their listed portfolio company to rise above a
particular price before they exit a position.
Monitoring the average daily volume of shares in
a company traded on a stock exchange is also important. Thinly traded companies
are harder to sell to investors in large portions.
This measure in particular can help to determine
the price agreed with a selling shareholder. In a heavily traded stock, a bank
can offer to run a deal closer to a company’s closing share price in order to
win the mandate because of the wide appetite among investors.
Checking conflicts is also important for a bank
to monitor. If a bank is working in another capacity for an issuer or selling
shareholder, or a rival eyeing the issuer as a potential acquisition, it could
be conflicted out of handling the deal.
Next step, consider what you might do to win the
deal...
Winning the deal
There are two ways to win a mandate. A client either selects a banking institution in advance of the trade to place the deal, or it arranges an auction to find the bank willing to run its deal at the highest price.
Selling shareholders will often ask banks to run
the trade at their risk, meaning an investment bank will agree to underwrite
the shares of a company it is selling on behalf of the backer. This can be done
in a number of ways.
Commonly a bank will agree a “backstop” price,
usually referenced as a percentage discount to a company’s closing share price
on the day the block trade is launched. For example, an investment bank may
agree to underwrite a company’s shares on behalf of a seller at 3% below its
closing price.
The bank would then sell those shares anywhere
above that 3% discount, often arranging a profit-sharing agreement with the
seller if it is able to find buyers at a tighter discount.
While banks are paid fees for block trades,
bankers say the biggest gains can be made in selling stock above the price at
which they have agreed to backstop the trade.
If you have been mandated on the deal, follow
steps below. Otherwise, skip to an auction...
Mandated trades
Selling shareholders occasionally opt to mandate a particular bank with which they have an existing relationship to carry out an accelerated bookbuild.
With a mandated trade, banks have more time to
prepare for a particular auction. Top investors in the company are sometimes
“wall-crossed”, whereby bankers bring them inside a Chinese wall to gauge their
interest ahead of the deal. They are barred from trading the stock ahead of the
deal and sign non-disclosure agreements.
A team of bankers from across a bank’s equity
capital markets, equities trading and investment banking, often arranged into
various committees, agree on the best price to run the deal.
Auctions
Often arranged by lawyers or independent equity advisers such as Rothschild, Lazard or STJ Advisors, auctioned block trades can be tense, rapid-fire events with little room for error.
These situations involve pitting a handful of
investment banks against one another to generate the highest price for a
selling shareholder.
One ECM banker described the process as “getting
a bunch of people together and letting them cut their throats”.
Bankers will often be called on the afternoon
before the launch of an overnight deal to be asked to sign a nondisclosure
agreement. They will then be told the name of the selling shareholder and the
position they wish to exit, before being asked to name the price at which they
would be willing to run the trade.
The timing of this call can be key. Often it
will come as early as 2:30pm, while other auctions can come later in the day.
One particular trade last year was marred by a
late auction, at 7:30pm London time. This left the investment bank that won the
deal little time to sell to European investors, causing the block to turn sour.
Two bankers said independent advisers had asked
them to meet a rival’s bid for an auctioned block trade which they later felt
to be a ruse to artificially inflate the price of a deal.
As part of the bidding process, one bank may
emerge as the only institution prepared to do the deal. In others, a small
syndicate of two or three institutions may be arranged to split the workload.
Arranging internal committees of senior bankers
to decide on a price for the trade can be a frantic affair, often with less
than an hour open to banks to submit a bid. Decisions can go as high as a
global investment bank’s group executive board level, particularly on $1
billion-plus deals.
Now that you have gone through the stress of
winning the deal, it's time to get the transaction done...
Execution
Once a bank or syndicate of institutions has
been selected to handle a block trade, the deal shifts from the equity capital
markets desk to the trading floor.
Banks’ sales teams will look to sell the trade
overnight to investors, at first targeting European accounts in the first hours
after the London market close, before looking to US buyers.
There are a number of ways this deal will get
done. Read on below...
Books covered
If there is sufficient demand for the deal, the
bank or syndicate will send out a coverage message to the market.
Stock will then be allocated to investors who
placed orders for shares on the following morning before the market opens.
If you are unable to find enough buyers for the
shares on offer, consider one of the following three options...
Handling a residual stake
If the bank or syndicate fails to secure
sufficient orders for the deal, there are a number of options available when it
comes to handling the position.
Cutting your losses
Banks cut their losses on occasion when they
have failed to fully distribute a block trade, rather than running the risk of
holding on to the stake for a longer period.
In one example last May, Morgan Stanley was
unable to distribute fully a €612.5 million sale of stock in fashion brand Hugo
Boss on behalf of buyout firm Permira, according to two people familiar with
the matter. The bank had agreed to backstop the trade but sold shares in the
company below that level to avoid being left with a residual position for a
prolonged period, the people said.
Warehousing
Although bankers say there is no uniform way to
handle a residual stake, holding on to a position in a tactic known as
“warehousing” is perhaps most common.
The position would be held on the bank’s
equities trading book, with buyers for the shares found in dribs and drabs over
several weeks.
In one example last July, Deutsche Bank and
Goldman Sachs were left with about $120 million worth of shares each in German
residential property company Gagfah. The investment banks were forced to
publicly disclose these positions on the Frankfurt Stock Exchange after the
trade. However, they have since exited these positions, according to one person
familiar with the matter.
Finding a strategic buyer
A less common resolution to a soured block trade
could come in the shape of a strategic buyer, stepping in to purchase the
shares from the bank that was unable to fully distribute the trade.
In one high-profile example of a soured block
trade, Barclays was left with a €697 million position in Dutch cable company
Ziggo last March. US media company Liberty Global then bought the stake in a
€632.5 million deal a week later.
