Botched Block Deal Leaves Barclays With $900 Million Stake In Dutch Cable Giant Ziggo
In the latest instance of a block deal by an investment bank going bad, Barclays (NYSE:BCS) ended up with a 14.2% stake in the largest Dutch cable TV operator Ziggo – a stake worth €697 million ($900 million) – while trying to facilitate the sale of a 20% stake in the company as the underwriter. [1] This development is not going to bode well for the British bank, which is staring at millions in potential losses linked to the unintended stake, even as the U.K. government furiously debates imposing significant restrictions on investment banking operations of the nation’s biggest banks.
Last April, Morgan Stanley (NYSE:MS) found itself stuck with about half of the $982 million stake in Danish phone company TDC’s shares that the U.S. investment bank set out to sell. In November, HSBC (NYSE:HBC) found itself in a similar situation with a €410 million ($530 million) stake in Spanish IT company Amadeus. The growing number of such incidents is indicative of an important change in the equity underwriting industry – the investment banks are willing to take on much more risk than they prudently should, in order to out-bid competition while vying for a particular deal.
As of now, we stick to our $21 price estimate for Barclays’ stock, which is about 15% ahead of current market prices. It must be noted that bank stocks, particularly those based in Europe, have lost considerable value recently due to the EU’s mismanagement of Cyprus’ bailout.
See our full analysis for Barclays’ stock
Understanding ‘Block Deals,’ And What Went Wrong For Barclays
Institutional investors who are looking to sell a sizable stake of their holdings in a particular company would normally hire an investment bank to underwrite such a deal in the global equity market. Now as an intermediary, the underwriting investment bank has two options. The almost risk-free option for the bank would be to approach potential buyers for the shares and once it has the backing of the number of buyers necessary to complete the deal, to simply facilitate the sale from buyer to seller – pocketing a fee in the process.
On the other hand, the underwriter can assume the entire risk of the deal by agreeing on a purchase price of the stake (or the entire ‘block’) with the seller and then selling the stake in parts to potential buyers. This is the simplest form of a block deal. Clearly the bank stands to gain more through such a deal to compensate for the additional risk it undertakes, if you will, while the seller is also guaranteed of a price for the stake.
But the risk involved comes to play when the underwriter finds no takers for the shares after it has committed to buy the complete stake being offered. In this particular case, Barclays agreed to purchase the 20% stake (40 million shares) Warburg Pincus and Cinven held in Ziggo at €25.05 apiece. But the plan backfired when less than 12 million shares could be placed in the market – leaving Barclays with a 14.2% stake.
Current Market Conditions Threaten Millions In Losses
Stuck with the shares, Barclays would ideally want Ziggo’s share price to cross the €25.05 level so that it can earn a neat profit on the deal. But the weakening outlook for Europe combined with the economic mess in Cyprus have seen stock prices fall in markets around the globe. Ziggo’s shares are no exception, trading below €24 on Monday. This already represents a notional loss of €30 million ($39 million) for Barclays on the stake, with the outlook remaining negative.
Major losses will hit Barclays’ fee income on underwriting, which we represent in the chart above as a percentage of total deal size managed over the year. You can see how a reduction in this value affects Barclays’ stock price by making changes to this chart.
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Notes:- Barclays accidentally buys £600m stake in a Dutch cable TV business, The Guardian, Mar 22 2013 [↩]