Acting quickly was vital for Deutsche Bank to enable its private equity client to lower its holdings in a leading electrical supplier without unleashing sustained pressure on the share price.

A group of private equity investors has fizzed up liquidity in the shares of Rexel, the French electrical parts distributor, by means of two impressively large accelerated bookbuilds. Deutsche Bank was bookrunner to both.

Rexel, with sales of more than €13bn and a presence in 37 countries, is the world’s biggest supplier of electrical products to electricians, contractors and the wholesale and retail trade. In its lifetime, it has been through more different types of ownership than most. It was established via the merger of four companies in 1967 and listed on Paris’s Second Marché in 1983. A majority stake was bought by Pinault Printemps Redoute (PPR), the French retail conglomerate, in 1990. Fifteen years later, as PPR refocused on its luxury brands, it was the subject of a leveraged buyout.

Its new owner was a consortium including Clayton, Dubilier & Rice (CD&R), Eurazeo and Merrill Lynch Private Equity, via their joint investment vehicle, Ray Investment. They paid €1.9bn for PPR’s 73.5% stake, bought out minority shareholders for another €690m and took on €1.1bn of the company’s debt.

Only two years later in 2007, the company was back in the public markets, after France’s biggest-ever spin-off initial public offering (IPO). The issue price of the shares was €16.50, raising a little more than €1bn. By the time the dust had settled, CD&R and Eurazeo each owned 23% and Merrill Lynch 18%. Long-term investor Caisse de dépôt et placement du Québec (CDPQ) had 7%. Employees owned 2% and treasury shares accounted for another 1%, leaving a small and, by definition, illiquid free float of 26%. Which is where our story really begins.

Illiquid asset

While the investors did not immediately feel moved to confront the illiquidity issue, they gave Rexel free rein to continue to grow. In 2006 it had acquired General Electric's US distribution subsidiary GE Supply (since renamed Gexpro), which doubled its US sales and made it the market leader in North America. It doubled its sales in Europe by acquiring a majority stake in the European assets of Hagemeyer in 2008. It also acquired businesses in China, India and South America. And yet this expansion was not being fairly reflected in the share price, which dipped below €5 in the dark days of 2009, briefly peaking at about €18 in early 2011, before heading back towards €10 in the latter part of that year. The market was always aware of the 71% overhang.

The first stab at shaking things up came in March 2012, when Ray Investment decided to increase the free float – and it hoped, liquidity – by selling a large block of shares into the market. It chose Deutsche Bank to handle the trade. That was not unreasonable, since the bank was just then emerging as the leading French equities house. Figures from Dealogic show it to have been the number one bookrunner for French equity capital markets (ECM) deals from January 2012 to the beginning of March 2013.

The bank has taken a particular interest in Rexel’s stock for some time, with coverage and full research. “We have consistently pushed this stock for a number of years,” points out Valéry Barrier, Deutsche Bank’s head of France ECM. “Since 2010, we have organised 17 roadshows and introduced management to around 200 accounts.”

Accelerated challenge

Frank Kennedy, managing director in Deutsche Bank’s ECM syndicate and a specialist in block trades, insists that this is the depth of knowledge necessary for a bookrunner to succeed with an accelerated bookbuild. “Getting the right outcome is not just a wild swing with a bat,” he says. If the bank is asked to handle an accelerated placement for a stock it does not have a strong conviction on, he adds, it often says “no, thank you”.

In this kind of situation, where everyone knows exactly how much stock a seller is sitting on, an accelerated bookbuild is the best way to move a large block of it without battering the price. Where the size of a holding is a mystery, it is possible to dribble out the shares over a period of time without hitting a wall of short selling, but Ray Investment would have needed years to get away with it. Mr Kennedy says: “The only unknowns [for Ray Investment] were when they would sell, which holders would sell how much, and what would be the pricing requirements.”

So in March 2012, the investors mandated Deutsche Bank as sole bookrunner to sell about 11% of Rexel’s existing shares via an accelerated bookbuild. The exercise raised €473m and increased the free float to 38%. It left CD&R holding 20%, Eurazeo 18%, what was now Bank of America Merrill Lynch (BAML) 15% and CDPQ 6%.

Mr Barrier says: “We sold the equivalent of 83 days’ trading volume in just a few hours. The shares were priced at €15.75, a 4.8% discount to the previous close, and the stock then traded up.” Not for long, however. By the summer, it had drifted down towards the depths of €13 and below, underperforming the market.

Plan B

Clearly, another round was going to be needed to liberate the share price from its chains. That may have been acknowledged in principle, but the practicalities of this unusual ownership quartet meant it was always going to be a last-minute decision. The three private equity houses may be partners on the Rexel share register, but they are competitors in other fields, which makes the relationship more intricate. With four sellers rather than one, if one wants to sell they still have to persuade the other three. What none of them wants is a leak that will put pressure on the price and nibble away at value.

”Private equity always has something to sell and windows are small,” says Mr Kennedy. “Markets can turn at a moment’s notice, so they do not want everyone to know what they are doing.”

The release of Rexel’s 2012 results on February 12, 2013 provided an opportunity to move. The figures demonstrated a resilient performance in trying times, and during that day and the next, the shares rose by 7%. In the early afternoon of February 13, Ray’s investors decided a suitable window had opened. From that moment, things moved very fast indeed. Banks were invited to pitch for the mandate, and Deutsche Bank and UBS were appointed joint bookrunners. The transaction was launched that very evening, at 7.30pm Paris time. The books were covered within 80 minutes.

Choice of investors

The books stayed open until the following morning to capture the rest of European demand. By the time they were closed, shortly before the market opened, the offer was three times oversubscribed, with orders worth about €2bn. The transaction was accordingly upsized from 35m to 40m shares, representing 15% of the company, at a placement price of €16 (tellingly, still below the IPO price in 2007).

While demand was equally split between long-only investors and hedge funds, the former were allocated two-thirds of the stock. UK-based investors took about 50%, with 30% going to the US and the balance to the rest of Europe.

The discount to the previous close this time was 2.6%, nearly half that of the previous sale, and the volume represented 143 trading days. “It was the largest placement of French equities since 2008 in terms of relative size,” says Mr Barrier. 

With CD&R down to 15%, Eurazeo 13%, BAML 10% and CDPQ 5%, the free float is up to a more oxygenated 54%. The stock traded up fairly quickly to €18 and has more or less stayed there. The narrowness of the window of opportunity was demonstrated that same morning after Legrand, the French electrical equipment maker, reported its own annual results. By noon, its shares had fallen 1.8%. “If we had done the trade after Legrand reported its numbers, it would have been more...,” Mr Barrier pauses for a moment, “...complex.”


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