Deal: Block trade in BP stock
Amount: £1.2 billion
Launched: May 14
Firm: Goldman Sachs
At 4.45pm on May 14, Gary Williams, head of equity trading at Goldman Sachs in London, was in a routine meeting at UK regulator the Securities & Investments Board. A note was passed to him from the secretary of Wiet Pot, Goldman's London head of equity sales. It was terse: "There's a big trade on, get back here." Williams sensed something out of the ordinary and immediately announced he was leaving. He grabbed a mobile phone - luckily one belonging to a Goldman colleague - and was dialling on the way out of the door.
"Big trade" was an understatement. What was beginning to unfold was the largest-ever block trade in the UK equity market, the sale by the Kuwait Investment Office (KIO) of 170 million shares in British Petroleum (BP) - 3% of the company's equity worth £1.22 billion (nearly $2 billion). In the next 18 hours, Goldman won and executed this trade - a complicated cross-market block deal including ADRs in New York and ordinary shares in London, each trading on different settlement cycles.
The process that led to Williams's breathless rush back to Goldman's offices in Peterborough Court had begun months earlier when the KIO appointed Schroders to advise on and structure a placement of part of its 9.3% holding in BP. This holding was a legacy of the KIO's purchase at the time of BP's difficult flotation just after the 1987 crash and its later sale back of part of its holding to the company, at the behest of the UK government. In the succeeding decade the value of KIO's holding had grown to some $6.5 billion. The KIO concluded that this was too much exposure to a single stock. Its motive for the sale was simple: portfolio rebalancing.
Over the years, many banks had approached the KIO with suggestions for selling part of its BP stock and once or twice a year rumours would circulate of a deal in the offing, the latest rumour being this February. But when the sale finally came, it caught everyone by surprise. With most UK block trades the sale is flagged in advance, bidders pre-market to key investing accounts, the market begins to price in the new supply and the block is sold at a narrow discount but to a depressed stock price. This deal dropped out of the sky.
Other options had suggested themselves - a fully roadshowed offer for the block, a truncated 48-hour book build, a tender auction with some kind of underwritten back-stop price. Finally, though, a block trade in which secrecy was paramount was chosen. This allowed the KIO to select the absolute best time for the disposal and to proceed with lightning speed, rather than commit itself to an open timetable and risk either a general equity market downturn or a collapse in BP's share price because of professional short-selling.
At 4.40 that Wednesday afternoon, Philip Mallinckrodt, a director in equity capital markets at Schroders, contacted three potential bidders: Goldman Sachs, UBS and a consortium of Salomon Brothers and Kleinwort Benson. The bidders were self-selecting on the basis of their previous proposals to the KIO for disposal of the block, their capital strength, their good oil analysts and their positions as leading traders in the UK and US stock markets.
Schroders faxed a confidentiality agreement to each bidder, requiring that it commit itself not to deal in the stock for 48 hours after the auction, if it lost the bid, and not to alert its investing clients that the block was coming, if it lost. Bidders were told that they had a small number of competitors, but not exactly how many or who they were. The losers would not be told who had won, though the winner would be told which other firms had also bid and lost. Schroders asked each bidder to sign the confidentiality agreement, send it back and dispatch their documentation teams to Schroders' offices to study the underwriting agreement. Bids were to be submitted in pence within one hour. By 6pm or shortly after the winning bidder would be told that it now owned the stock.
Schroders was being paid a fee for its services and was not taking principal risk. But still it was sticking its neck out. No-one had ever asked a firm to put up $2 billion of its capital in such a way, in a blind competitive bid with no time for pre-marketing. What if no-one played ball? But they did. "What we achieved is a testament to the depth and development of the international equity markets," says Mallinckrodt.
In well under 20 minutes Goldman assembled on a single conference call the top seven executives in its equities business on both sides of the Atlantic - as well as Williams, Pot, there was Patrick Ward, and Robert Steel, co-chief operating heads of the equities division; Eric Dobkin, global head of equity capital markets; Roy Zuckerberg, global head of equities and a vice chairman of Goldman Sachs; David Rogers, global head of equities risk management. Also on the line was John Thain chief financial officer of Goldman Sachs. A later call was made to the chairman, Jon Corzine.
The seven equity specialists discussed the price at which they could sell on the BP shares to investors. BP stock had spiked up earlier in the week, following strong quarterly earnings announcements, and stood at 744p. Goldman knew that many UK investing institutions were underweight BP stock against their UK market benchmarks. These investors, offered the chance to buy a big block of the largest UK stock at a discount to the market price, would need to come up with a good reason not to bite. American investors were tougher to read because their holdings in BP would be assessed against different benchmarks, of leading European stocks or of oil stocks. But American holdings of BP stock were clearly below their highs.
"Our starting point was that enough investors would care at 715p and we could probably get it done at 716p and maybe even 717p, but that any higher would be pushing too close to 720p and we could not get it done at that level without sloppy placement," says Williams. "We had an obligation to all our clients, both potential buyers and the seller, who would retain a $4.5 billion investment in BP, to achieve the best quality placement at a price that would be sustained." Goldman settled on 716p, and then factored in a 75bp turn for itself on the deal, leading to a bid of 710.5p.