Private equity firm TPG has used its negotiating prowess to acquire cut-price shares from WaMu and B&B – in return for much-needed rescue capital.
Desperate consumers sometimes turn to unregulated door-to-door lenders to raise cash in an emergency. They know that interest costs will be hugely punitive but believe that they have no choice.
Shareholders in US bank Washington Mutual (WaMu) and the UK’s Bradford & Bingley (B&B) may well be feeling that the rescue capital from private equity firm TPG will be just as expensive, but many argue that both firms could have taken an alternative route.
In April, WaMu’s board agreed a $7bn infusion, selling the shares at 26% below the stock’s price on the day of the deal; it also sold 20,000 preferred shares that would convert into common stock at the same discounted price and issued warrants allowing TPG to acquire a further 68.2 million shares. Then, in May, B&B scrapped a plan for a £300m ($589.7m) rights issue, at 82p a share, and instead sold £179m-worth of new shares to TPG at a deeply discounted 55p a share, raising £258m.
Shareholder anger
In both instances, the capital was extremely welcome; but both deals are enormously dilutive for existing shareholders who also complain that they were not given a bite of the discounted cherry.
Moreover, WaMu’s shareholders – who must vote on the deal – are livid that the deal is structured in such a way that it is almost impossible for them to say no. Delays to approval invoke financial penalties in the form of increasing special dividends (from 14% to 15.5% to 17%) that must be paid to the TPG investors. Outright rejection is also an expensive option: the price at which the warrants can be converted will decline by 50 cents every six months with a maximum drop of $2 a warrant.
Advantage TPG
There is no doubt that private equity can bring welcome capital and management skills to the table at a time when they are needed and, clearly, TPG is a dab hand at negotiating. But many are asking themselves whether these deals were warranted on terms that were so much better for TPG than they were for anyone else.
Bank management teams are showing signs of panic but they must avoid being panicked into deals that alienate the existing shareholders and seem all too one-sided.
