The continued strength of stockmarkets in Europe is a pretty certain guarantee that vendors with large blocks of shares to sell will be tempted to hit the market in the fourth quarter.
Governments with privatization programmes are sure to feature prominently. The value of block trades linked to privatizations in Europe has already surpassed A12 billion this year and bankers expect to see a few more multi-billion euro blocks before the end of the year.
Governments and other vendors would do well to look back on how block deals have gone so far this year and how they were done.
Bankers blame the messy execution of a number of blocks, especially earlier in the year, on the practice of selling large blocks to banks in competitive auctions. But it is really bankers’ over-aggressive bids for blocks that have led to their poor pricing, not the practice of selling blocks by auctions per se.
Vendors favour auctions because they give them a high and often guaranteed price. It is also easy for them to argue that they got the best price because they invited the world’s biggest investment banks to bid for the shares and sold them on to the highest bidder.
The best price, however, is not always the highest price and vendors that are likely to return to the market in the future need to be wary of preserving their reputations.
Some of the most successful blocks this year, such as KfW’s A2.4 billion sale of Deutsche Post shares, have been mandated offerings. Choosing one bank or a small group of banks to handle a large trade gives added flexibility over the timing of a sale, which can make a big difference to the eventual price.
It also gives banks more time to find quality investors. The market knows when lock-ups are expiring. Often investors in auctioned blocks end up being the hedge funds that shorted the stock in anticipation of the sale and are just covering their positions. Allowing more time to find long-only investors gives hedge funds less of an opportunity to cover themselves and so discourages shorting.
Bankers say that private-equity players, commonly regarded as the constituency most obsessed with high prices, are coming round to the idea of mandated sales. Fees are likely to be higher on these trades but a block that leaves investors as well as vendors happy is probably worth more in the long run.
