Type of deal: Block trade of BSkyB shares
Amount: £430 million
Seller: Granada
Broker: BT Alex Brown
In such volatile financial markets, most investment banks are overwhelmingly concerned to reduce their exposures and risk-taking. So when BT Alex Brown took on a £430 million ($730 million) block trade in BSkyB shares towards the close of London trading on Tuesday October 13, it simply took the market’s breath away. With equities volatile, BSkyB, a high-beta stock, has been even more volatile than the general market. It is illiquid, with only 30% of share capital in free float before this deal. And it has in the past traded as high as £7, hitting a low of£3.33 in February this year and rising to £5.50 in late September.
BT Alex Brown bought the block of 111.5 million shares, representing a 6.3% stake in BSkyB, from UK media and hospitality company Granada, paying £4 a share at a time when BSkyB had been trading at £4.40. It then rushed to unload the shares, mainly to US and UK institutions, at £4.04.
These kinds of deals are nerve-wracking at the best of times. “To take on such a large line of stock, given recent market convulsions and investor nervousness, was a particularly gutsy call,” says the London-based head of equity capital markets at a leading rival firm. “The recent experience with block deals in European shares has been, to put it mildly, mixed. Some dealers escaped heavy losses by the skin of their teeth on deals a few months ago. Since then, these trades have become quite rare.”
It was not only a rare deal but also a highly unusual one. BSkyB is in the process of taking over the listed football club, Manchester United. That meant that normal London Stock Exchange allowances for delayed reporting of large trades – which allow brokers to shield execution from their rivals’ gaze – could not be claimed. BT Alex Brown had to report publicly the moment it bought the block, and then immediately on every trade it struck as it unwound the position.
If that put a strain on the salesmen and traders at BT Alex Brown, they could hardly complain. It was because of the Manchester United takeover bid that the closest investment banks and brokers to BSkyB, including Goldman Sachs and Credit Suisse First Boston, which Granada might normally have approached to place the block, could not be involved.
So BT Alex Brown stepped into the gap and was even able to negotiate an exclusive arrangement with Granada to work on the deal. Normally, block trades are subject to competitive bids. Granada didn’t want word of the coming new supply of BSkyB shares to leak, because it feared that in nervous markets that might crush the price. But as preparations for doing the deal progressed over two weeks, Granada did agree to allow BT Alex Brown to sound out the potential reaction of a select group of investors on the stock becoming available at a discount.
The real make-or-break bid for BSkyB today is not to buy Manchester United but its costly effort to persuade Britons to subscribe to digital television. It’s a battle that brings it into direct and fierce competition with, among others, Granada.
“BSkyB is a concept stock. You are selling a dream,” says Edmond Warner, managing director in European equity sales and trading at BT Alex Brown. “BSkyB is impossible to value on a traditional earnings per share or dividend-yield basis. You’re doing discounted cashflow analysis out years ahead on a new product launch now in its earliest stages.” That might not sound an easy sell in such a difficult market. But what BT Alex Brown discovered in preparing for and executing the trade provides an intriguing insight into the minds of mainstream equity investors.
First, they have built up treasure troves of cash, both from recent selling and from holding off from investing new inflows earlier this year because of fears that the markets were overvalued. UK pension funds have on average 10% cash balances – close to record highs. For the right stock at the right price, there are eager buyers even amid general nervousness. But what is the right stock? “In the current environment, when earnings risk abounds, a real growth stock will be in demand,” says Warner. “One for which growth should come irrespective of the cycle of the real economy,” says Warner. “People will either buy digital TV or not whatever the condition.”
To do the deal at all, Warner and his colleagues, who had all come to BT Alex Brown from NatWest Markets in an acquisition that closed just five months earlier, had to win over anxious bosses in New York reeling from losses elsewhere within the firm. These recently led them to close down the European emerging-market equities business. But mainstream European equities had benefited from the high volumes even during recent sell-offs. “We’ve had some record days in commissions and some record trading weeks,” says Warner. Now the firm was anxious also to show that it had capital available and was ready to use it, in the right circumstances.
At times, it seemed the deal would not come off. BT Alex Brown waited for conditions to look right. On Monday October 12, European stock markets rallied strongly and on the following morning there was no sign of markets falling back again. The BSkyB stock price was rock solid at£4.40. The time had come. BT Alex Brown agreed the deal with Granada in mid-afternoon and at about 3.30pm briefed its salesforces in Europe and the US. Final documentation and formal notification to the stock exchange came at 4.15pm and the firm began selling like crazy on a first-come, first-served basis. There was little subtlety. “We wanted to create a stampede,” says Warner. The London market was still open but due to close at 4.30pm. Key salesmen reached core accounts in an effort to build momentum, while other salesmen reminded clients that with the US salesforce selling the deal for hours to come the trade might not be there the next morning.
At 4.21, Warner took a call from Ted Virtue, president of BT Alex Brown, in New York, asking how the deal was going. On track, Warner replied – no huge buy orders from unlikely quarters but no unexpected rejections either. Warner put the phone down and walked back to the desk. Two minutes later, he called Virtue back. The deal was done. BT Alex Brown was off risk. The whole thing had taken nine minutes. Warner and his colleagues went out to celebrate.
Next day, the stock was back at £4.40 and in later days it traded up to £4.60 in line with the market. Whether BSkyB’s dreams of glory in digital television come true will not be clear for months or even years.
Still, quite a deal.
