Morgan Stanley has won repeat business from issuers for a number of European accelerated bookbuild transactions, which require the most careful pricing and timing to complete successfully.

It has been a busy year for the accelerated bookbuild (ABB), especially in the financial sector, though these are not the easiest transactions to pull off. They are fast and dangerous, and if they go wrong they can hurt shareholders, the business or the bank, and sometimes all three. Mandates are typically rotated, but the team at Morgan Stanley has been paid the compliment, more than once, of getting repeat ABB business from the same client. Nordea was one of them.

In late September, the Kingdom of Sweden unloaded the last of its shares in Nordea via a SKr21.6bn ($3.4bn) ABB. The state had taken equity in Nordea and other banks in the early 1990s as part of the government’s robust handling of Sweden’s banking crisis. A Swedish minister described the September sale as finally closing the door on that whole affair.

An ABB is typically used to sell a large block of shares, primary or secondary, either to raise capital or reduce the stake of a particular shareholder. It is generally announced after the market closes, and priced before it reopens the next morning, so the seller is not exposed to movement in the share price and has the shortest possible exposure to market risk. Since there is no prospectus and no marketing, and the only lever is price, ABBs are most commonly used to shift secondary blocks in well-researched companies.

Name recognition

Nordea is well known as the largest Nordic bank, so the Swedish state opted for an ABB when it began to get rid of its 19.8% stake in February 2011. With Nomura as global coordinator, joined by Morgan Stanley and SEB as joint bookrunners, it sold 255 million shares – a 6.3% stake – at SKr74.50, a 5% discount to the last closing price. Shortly thereafter, it appointed Morgan Stanley to advise it on further disposals.

“The primary objective initially was to consider a ‘dribble-out’ of the stake, similar to the one we did in Citi shares,” says Magnus Andersson, Morgan Stanley’s head of Nordic equity capital markets.

Back in 2010, Morgan Stanley successfully sold two-thirds of the US Treasury’s post-bailout 7.7 billion shares in Citigroup by dribbling out small parcels, discreetly but continuously, over a period of eight months. That was because the stake was considered too large to sell in one go. Once the dribble-out had broken the back of it, the last 2.4 billion shares were offloaded in a single mammoth offering.

The bank put together a framework for a Nordea dribble-out, announced in June 2011 but then cancelled as market conditions deteriorated. Later, the time needed for such an exercise meant that it might run into Sweden’s next general election, and no one wanted to be in the market during an election campaign, so attention returned to ABBs.

Since price is everything in an ABB, the bookrunners want to launch when the shares are buoyant and keep the exercise absolutely secret. If the market knows the deal is coming, the stock may underperform. “If they know it’s coming and it’s well spoken of, you may get a smaller discount,” says Martin Thorneycroft, Morgan Stanley’s head of equity syndicate for Europe, the Middle East and Africa. “But if there is no talk, you get a higher price to launch off.”

Narrow window

There had been some market expectation in April this year, but by mid-June it had petered out. Nordea’s price was back in the relative uplands, and its second ABB seized what turned out to be the narrowest of windows. No one wants to launch too close to a company results day, and one was due in mid-July, so time was already limited. The Swedes would decamp en masse for their summer holidays even earlier, at the beginning of July. And the very next day, Federal Reserve chairman Ben Bernanke was due to give a press conference, which could prove a market shaker.

The thinking was that it would be better for Nordea to control its own destiny and go before Mr Bernanke spoke, than to wait and hope that his words did not upset the market. ”We said if you go tonight, we’ll get it done for you, tighter than last time,” recalls Mr Thorneycroft. With Morgan Stanley as global coordinator and joint bookrunner with Credit Suisse and SEB, Nordea did indeed sell more shares at a tighter discount than before, moving 260 million shares (a 7% stake) at SKr75, a 4.8% markdown and raising the equivalent of $3bn. The timing was perfectly judged, as Mr Bernanke promptly set the cat among the market pigeons by suggesting that he could start to reduce quantitative easing within a year.

The transaction came with a typical 90-day lock-up period, during which the seller undertook not to dispose of any more stock. That expired on September 23. “We were in the market again on the evening of September 24,” says Mr Andersson. “There was a very short window between the expiry of the lock-up and the end of the quarter in a few days' time, and the market was not expecting us to come back so quickly.”

This time the deal fared better still, shifting 284 million shares (the state’s final 7%) at SKr76, a discount of 4%. Joint bookrunners were Goldman Sachs, Bank of America Merrill Lynch and Carnegie. The shares traded up a creditable 1.5% in the aftermarket, having barely moved at all after the June transaction.

“Our client was fortunate enough to choose the right points to sell Nordea, but you cannot pick the peaks every time,” says Mr Andersson. “Our job is to tell the client when market conditions are appropriate for a transaction, and to market it to the broadest possible audience in order to price it well and maximise the size. And that last transaction was a very meaningful size.”

Repeat business

If Nordea was a repeat user of Morgan Stanley’s ABB services, so was Daimler as it sold down its stake in the European Aeronautic Defence and Space Company (EADS). The bank acted as joint bookrunner for block sales of €2.4bn in 2006 and €1.7bn in December 2012, and was mandated joint global coordinator and joint bookrunner (with Goldman Sachs) for the ABB of Daimler’s residual 7.4% stake in April 2013.

The April deal incorporated a twist which guaranteed Daimler some of the upside should EADS shares rally over an unspecified period of years, via rolling cash-settled contracts with both investment banks. As it happened, that helped the success of the €2.3bn ABB, since the banks placed an order of up to 8 million EADS shares to establish their hedge position. Another fillip came from EADS itself, which bought €600m-worth of stock as part of its share buy-back programme.

More recently, Morgan Stanley has also enjoyed some repeat business from RBS, as the latter extricates itself from ownership of the Direct Line Group (DLG) insurance business. Morgan Stanley acted as joint global coordinator and joint sponsor for DLG’s all-secondary share offering in October 2012, and was joint bookrunner in a subsequent sell-down last March. In September it was joint bookrunner for a £630m ($1.02bn) ABB, taking RBS’s divestment up to 71.5% of the company. Following a growing trend in European ABBs, the transaction incorporated a greenshoe option. “The greenshoe is about stabilisation,” says Mr Thorneycroft. “It ensures an orderly two-way market on pricing day and thereafter.”

Conditions continue to support the case for European ABBs, according to Mr Andersson. “Price/earning multiples are as high as they have been for the past five years, which gives sellers comfort,” he says. “The ‘return to growth’ theme is played out in the US but is still alive in Europe. And investors have big cash balances which they need to reallocate. They can buy large numbers of shares in an [ABB] at a discount, which is very efficient for them.”

The popularity of this technique does, however, depend on the pricing judgement of underwriting banks, Mr Thorneycroft notes. “Some recently mispriced transactions have not performed well,” he says. “It is important to continue to price these transactions appropriately.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter