Richemont indulges in perfect timing
For luxury goods company Richemont, whose brands include watchmakers Jaeger-LeCoultre and Baume&Mercier, raising money was not a priority. It did, though, have a delicate timing problem. It owned 27.7% of British American Tobacco. But it also held just over 120 million convertible preference shares into BAT due to mature in June 2004 with a redemption price of 675p. If, at maturity, the shares were trading below 675p, Richemont would redeem the bonds and receive £820 million in cash. However, if the share price rose and the bonds converted, Richemont would go above the upper holding limit under the UK takeover code and be obliged either to launch a full bid - which it did not want to do - or become a forced seller.
Several analysts had already flagged Richemont's position, so it seemed likely that the market would react to the share overhang and the price would probably converge until the situation was resolved. This meant that Richemont would miss out on any upside above 675p per share and this effectively reduced the value of its stake.
One possibility was for Richemont to sell a call option on the 5% and earn a premium on that.