Share placements seem to be a trend in Germany this year.
After Commerzbank pulled off a capital increase that brought in billions of euros without conceding major price concessions to investors, private equity firm Permira did much the same with Hugo Boss, jettisoning its remaining shares worth almost €1 billion, or $1.1 billion, in March. Hours later, they were placed with major investors.
Hugo Boss’ reward could be a move up into the DAX, Germany's leading stock index, which is likely considering the increase in free float stock. The sale was also was profitable for Permira, which more than doubled its investment.
The volume of block trades will at least double this year.
Block trades, or the placement of large share packages to small groups of large investors, are performing well this year.
Major shareholders of Aareal Bank, Deutsche Annington, Kion and Zalando also sold off large blocks of shares while other companies are about to make similar moves, according to sources in the financial sector.
The Swedish private equity firm CVC plans “to sell additional shares of Evonik very soon,” while another private equity firm, Lone Star Funds, is looking to reduce its shares in the leading commercial real estate specialist, TLG Immobilien, sources said.
There were sales at both companies earlier this year.
For Jörg Rockenhäuser, head of Permira’s office in Frankfurt, the advantages of block trades are obvious.
“Red & Black, the holding company controlled by Permira Funds, had held over half of the Hugo Boss shares for many years,” he said. “You can’t place such a large number of shares as a single block on the market.” The best strategy is to release them in stages, he said. Hugo Boss gained new investors and greater liquidity of equity through a careful step-by-step process.
Andrew Formica, chief executive officer and managing director at Henderson Global Investors, also said quick placement is important because it allows for the movement of larger portfolios.
“To do it, you need a transparent and fair mechanism to bring buyer and seller together,” Mr. Formica said.
For Klaus Fröhlich, who is in charge of the capital markets business in Germany and Austria at Morgan Stanley, it is primarily financial investors who use the high level of stock prices to dispose of their holdings through share placements.
He assumes there will be more placements when the market protection clause expires for last year’s newcomers to the market. Then, existing shareholders will be free to sell additional shares.
“The volume of block trades will at least double this year,” he said.
To date, shares valued at €5.2 billion have been placed.
Investors have enjoyed strong earnings with block trades since they usually purchased stock at a considerably lower price.
The price reduction is larger the more shares are placed. The only time there’s no price advantage is when there is an anchor investor who will take the shares in any case.
“That was apparently the case recently with Kion,” Mr. Fröhlich said.
At the same time, Goldman Sachs and KKR passed on shares to the Chinese concern Weichai Power.
Market prices almost always continue to rise after a transaction, Mr. Fröhlich added. The price benefits from share placement are particularly good when “an excess of shares is fully reduced and the stocks gain liquidity on the stock market,” said Christian Gärtner, who oversees German-language equity market transactions at Bank of America Merrill Lynch.
Block trades interest portfolio manager Ingo Speich at Union Investment because “share placement offers a good opportunity to invest in a security with little stock market turnover.” However, a wide variety of investors take advantage of accelerated book builds.
“A good half of the shares are placed with hedge funds. In addition, investors who came away with nothing at the public offering, or only got a few shares, use block trades as an opportunity to increase their holdings,” said Morgan Stanley’s Mr. Fröhlich.
The business of block trades is enormously important to banks because increases of capital and initial public offerings have been quite rare in 2015, though that’s likely to change
“Since share placements have all been well accepted by investors this year, it also will provide momentum for other pending new issues,” Mr. Fröhlich said. The start-up Windeln.de got the ball rolling and has moved the offer period forward, starting Wednesday rather than delaying until May 8.
This likely won’t slow down block trades. Investors have acquired a taste for gradually disposing of their blocks of shares while simultaneously profiting from rising share prices. Hugo Boss imitators are much in demand.
Handelsblatt's Robert Landgraf is deputy head of the finance section, Susanne Schier heads the private investment team at Handelsblatt's Frankfurt finance desk. To contact the authors: [email protected], [email protected]