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Chaps in bowler hats are supposed to be reliable and measured. Messrs Bradford & Bingley (B&B) have thrown off their bowlers. Two weeks ago, B&B announced a £300m rights issue to repair its rather crunched balance sheet. To make absolutely sure that the money would be forthcoming, B&B and its advisers used two tactics.
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First, the price of the new shares was deeply discounted. If The Royal Bank of Scotland (RBS) needed a 46 per cent discount to get its £12bn rights issue away, humble B&B wasn't going to do any better. Its underwriters persuaded it to accept a 48 per cent discount to the already softened up market price. So the new shares were due to go out at 82p.
The second level of assurance was the underwriting itself. The RBS rights issue was underwritten for 1.5 per cent (or £180m), with a further 0.25 per cent in reserve if needed. However, RBS had economies of scale on its side. For B&B's smaller issue, the underwriting fee was 3 per cent, or £9m.
Rights issue underwriting fees always look like money for old rope. The RBS rights issue, which closes today, earned the investment banks who managed it £60m and the sub-underwriters who took most of the risk - such as pension funds and insurance companies - £120m. The underwriters of the B&B issue were, I'll bet you a pound to a penny, by and large the same pension funds and insurance companies who underwrote the RBS issue. Underwriters win a lot and lose a few. They don't do too badly.
Ten days after announcing the rights issue, B&B's monthly trading figures slumped. The share price had already dropped to 100p in the wake of the rights issue announcement. It would certainly go below the rights price of 82p when this news was released. No shareholders would take up the issue. The sub-underwriters would be obliged to buy the shares, then they would dump them on the market. They could easily lose most of the money they had just made on the RBS issue. Next thing, some opportunist would come along and buy a big stake for a ridiculous price, such as 55p. It was not going to be a pretty sight.
Still, B&B's £300m was secure. As it had pointed out in its rights issue announcement not once, but twice: "The rights issue has been fully underwritten by Citi and UBS Limited in order to provide certainty as to the amount of capital that the company will raise".
So what did B&B do next? Its chairman, Rod Kent, now took over. Rod Kent has a lot of experience of investment banking, having built up Close Brothers from tiddler to mid-weight during a 30-year stint as its boss. The first thing he did was let his chief executive go. The next was to recruit an opportunist investor willing to pay 55p a share, in the form of TPG, the giant US private equity firm. And, finally, he tore up the underwriting contract, letting the underwriters off the hook, and proposing a restructured rights issue at 55p a share - still paying 3 per cent for the privilege of underwriting it.
B&B's share register includes 840,000 small shareholders who hold less than 250 shares each (these were windfall shares allotted to its customers at the flotation eight years ago). In total, they hold a third of B&B's shares. Mr Kent argued that that these poor innocents could not be subjected to the drama of an under-water rights issue and it would be better to structure a deal allowing them to sell their unpaid rights for a few pence each.
This is a nonsense. First, the unpaid rights were never going to be worth more than £30 per small shareholder. The idea of cancelling a £300m issue to enable windfall shareholders to make a few pounds each is ridiculous. Second, the interests of all shareholders (except shareholders who had chosen to be underwriters, but they have other compensations) would have been better-served by minimising the dilution from the capital injection. Under the original rights issue, the current share capital would have represented 61 per cent of "future" B&B. Under the new arrangements, this is reduced to 44 per cent. I know which I'd rather have.
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Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
