Bradford revisited
The insurers and pension funds may be revolting. A number have contacted me to express concerns that the £179m being paid by the private equity giant for a 23% stake in is far too little - that the deal is a steal.
Well the terms of the sale are certainly unusual. What is most unusual is that TPG has been offered the opportunity to buy its holding at well below the prevailing market price.
TPG would pay 55p a share - which even now, after the rout in B&B's shares, is a hefty discount to the market price of 67.5p.
I simply can't remember the last time that a substantial British company sold a significant stake in itself at a discount of that magnitude.
And the very important point is that, as a matter of pure theory, when a company sells shares at less than the prevailing market price to an outside investor, its existing shareholders are impoverished - they end up with a lesser or diluted stake in that company's assets.
In this case, the dilution would be huge: B&B had shareholders' funds of £1.2bn at the end of December, but these are being valued at just £378m at the subscription price offered to TPG.
The value of B&B's net assets have fallen a bit since then. And some adjustment has to be made for other shares that are being issued. But arguably TPG is being given the opportunity to buy pound coins for about 68p each.
For the avoidance of doubt, it may be your pound coins that are being sold for less than face value - in that your pension pot may well be invested in Bradford & Bingley shares, whether you know it or not.
That is why big British pension funds and insurers have made it crystal clear to all British companies that they are never to sell shares at a discount to outsiders, unless they are in the direst of straits.
So just how dire was it for B&B last weekend when it was negotiating the cash injection with TPG?
Well, pretty dire.
It had discovered that profits for the year would be worse than it or the market had been expecting. And that a sharply rising proportion of borrowers of its buy-to-let and self-certified mortgages were experiencing repayment difficulties.
That raised worrying questions about the bank's internal financial controls - which was bound to undermine City confidence in its executives.
But the City was not given the opportunity to assess whether the chief executive, Steve Crawshaw, was still up to the job - because at the same time as the financial merde was hitting the fan, he was diagnosed with a serious cardiovascular illness and .
The third whammy was that the profit warning might well have derailed Bradford & Bingley's attempt to raise £300m in a conventional rights issue.
In other words, Bradford & Bingley was staring into the abyss. Its directors were bracing themselves to tell the market that profits were heading south, that mortgages were going bad, that it had a lost a chief executive, and that it was uncertain whether it would be able to raise the capital it had said it needed.
For the avoidance of doubt, none of this meant it was bust. It retained significant capital.
But in these times of high anxiety, the Treasury, the Bank of England and the Financial Services Authority all became extremely concerned about the possible consequences of announcing that quite so many things had gone wrong for Bradford & Bingley.
They were worried that Bradford & Bingley would lose the confidence of depositors and other creditors.
There was a fear that the of last autumn - a retail and a wholesale run - could be repeated.
So it was a fully fledged crisis at Bradford & Bingley.
And in that sense, the injection of funds from TPG was a rescue: it represented a very important vote of confidence in B&B by an investor of worldwide renown.
That's why the private equity group could dictate its terms.
But note well.
TPG has not yet subscribed the £179m of cash it has promised.
If existing investors in Bradford & Bingley think they are being short-changed, they have a few days to offer the bank a bit more than £179m.
It could be rational for a handful of pension funds and insurers to club together and find a couple of hundred million quid to trump TPG. Or one of these conventional institutions on its own could break the habits of a lifetime and manifest the cojones to do the kind of deal that has made fortunes for private equity firms and hedge funds.
I'm 
Comment number 1.
At 4th Jun 2008, Firey Shandy wrote:Precarious times these at Bradford and Bingley, in my opinion it would only take a few grannies waving their passbooks to sink this bank.
Perhaps you should do an alarmist piece as the main item on Ö÷²¥´óÐã news at ten and see if you could generate another run. Might be best to wait until tomorrow though as The Apprentice your fired is on Ö÷²¥´óÐã2 tonight.
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Comment number 2.
At 4th Jun 2008, doctor-gloom wrote:If the bank is sinking it will sink itself.
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Comment number 3.
At 4th Jun 2008, Tim wrote:Thank you for an interesting piece: some clarity is welcome in a situation where we are too often caught between the ostriches and the headless chickens (two breeds that seem inexorably compelled to comment on your articles!).
If only you could steer clear of American Spanish slang and a seemingly endless parade of daft synonyms for money...
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Comment number 4.
At 4th Jun 2008, Leonard26 wrote:I hear a while ago Mr Bradford and Mr Bingley lost their hats.
Now it sounds as though they have lost their shirts.
What price mutuality?
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Comment number 5.
At 4th Jun 2008, speedtheplow wrote:Doubt very much if the Brits will counter offer--they know only too well what they are getting themselves into. Does TPG?
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Comment number 6.
At 4th Jun 2008, Chris B wrote:For someone to inject capital at the market rate, you would have to be assuming that the new capital can be put to use earning the same risk adjusted return as the existing capital. Given that this is a defensive move to shore up the solvency/liquidity position, rather than to invest in new profitable business, it is not strange that someone injecting capital would only do this at a discount to the existing market value.
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Comment number 7.
At 4th Jun 2008, Hippy god says Peace and Love likes RT wrote:My posts are being bounced - why ?
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Comment number 8.
At 4th Jun 2008, Hippy god says Peace and Love likes RT wrote:There seems to be an automatic word blocker on this website
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Comment number 9.
At 4th Jun 2008, Hippy god says Peace and Love likes RT wrote:I mentioned that Nominee Account holders Shares may be being lent without their knowledge to their ultimate loss.
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Comment number 10.
At 4th Jun 2008, Hippy god says Peace and Love likes RT wrote:I also said the Brokers could be open to legal action if the Shareholders who hold Nominee Accounts lost out due to Share Price falls caused by Short Selling and Stock lending.
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Comment number 11.
At 4th Jun 2008, Hippy god says Peace and Love likes RT wrote:Several words automatically blocked - interesting - and hard to have a proper debate !
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Comment number 12.
At 4th Jun 2008, wykhamist wrote:I tried posting a couple of times too and my submissions just disappeared. I certainly didnt say anything libellous, rude or defamatory. What is it we are not allowed to say?
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Comment number 13.
At 5th Jun 2008, Hippy god says Peace and Love likes RT wrote:I do find it hard to believe that this private equity group sees B and B as a potential target.
Other High Street Banks are unlikely to bother going for it, they have their own troubles.
Though a couple of big banks, Barclays and Deutsch have been modest Shareholders for sometime.
Oh well us ordinary folk never get to hear about the big deals first.
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Comment number 14.
At 5th Jun 2008, Red Lenin wrote:Basically this is a market version of "lend us a fiver till payday". Problem is no-one knows when payday is.
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Comment number 15.
At 5th Jun 2008, MutantFriend wrote:A 'number' of pension funds and insurers have contacted you. Could you vague that up a bit more?
Was it 1 or 100?
Why are they contacting you? Could it be that they know you have a track record of recklessly repeating gossip and rumour, thereby attaching the authority of the Ö÷²¥´óÐã to the story and helping them achieve their objectives?
Please stop and think about the motives of the people giving you the information before spreading it in your excitable manner.
How I miss the considered analysis of Evan Davis.
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Comment number 16.
At 5th Jun 2008, knoseykneel wrote:In a very democratic way I think they have decided to limit the word-count. Some clot has been submitting ridiculously long comments. Supercalmdown managed to get by with 65 words in post 13. This one is 38 words.
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Comment number 17.
At 5th Jun 2008, alan_addison wrote:"manifest the cojones"! You made my day. Thank you, Robert.
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Comment number 18.
At 5th Jun 2008, iwanttoscream wrote:Hey, I'm glad I took all my money out a fortnight ago.
Remember GEC/Marconi !!!
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Comment number 19.
At 5th Jun 2008, John_from_Hendon wrote:vanishing posts - a technical problem?
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Comment number 20.
At 5th Jun 2008, John_from_Hendon wrote:So pithy one-liners are OK?
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Comment number 21.
At 5th Jun 2008, John_from_Hendon wrote:Why the limit?
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Comment number 22.
At 5th Jun 2008, knoseykneel wrote:Beeb may be concerned that company has issues.
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Comment number 23.
At 5th Jun 2008, knoseykneel wrote:You can buy pound coins for 32p based on December capitalisation, or 63p based on Wednesday share price.
If share price drops to subscription price, you could buy pound coins for a pound. No longer a steal?
Perhaps B and B could allay the fears of their shareholders along these lines?
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Comment number 24.
At 5th Jun 2008, bankssafeashouses wrote:What about my 32 thousands pounds of hard earned lifetimes savings is it buying contraband Havana cigars down El Paso way.........I and many others who have slaved hard all our lives are ripped off whilst the oafs who have had a good times in the Boardroom with their lavish lunches now get £2 million pay-offs.......Scuttlebuts or another word beginning with an S...
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Comment number 25.
At 5th Jun 2008, scargillwasright wrote:#24 - are you allowed to tell us how you lost your money ?
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Comment number 26.
At 6th Jun 2008, Hippy god says Peace and Love likes RT wrote:Apparently the Board of Directors have increased their Shareholdings (according to RNS) considerably yesterday.
So they are putting up some of their own cash.
Doesn't help the ordinary Shareholders.
At this Stage the best thing they can do is hold for the next couple of years.
Eventually things will settle onto an even keel.
So long as there are no more surprises !
Of course most of the ordinary investors have been scared away by the rollercoaster ride of the last six months.
Even the patience of the Pension Funds has been sorely tested.
Again as I said on another post, it all comes down to trust, without it the system won't work.
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Comment number 27.
At 9th Jun 2008, PJ wrote:1) I assume these are previously unissued shares. Surely the shareholders have to agree to a share issue at a General Meeting? They wouldn't agree to something that would dilute their holding in this way, would they.
2) I thought there was a law (or a stock market requirement) that new share issues had FIRST to be offered as a rights issue. Isn't there?
3) How exactly does the sale of new shares to TPG interact with the proffered rights issue?
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Comment number 28.
At 18th Jun 2008, bankssafeashouses wrote:Can we sue these clots for our losses. We have paid these asses good money , they fix themselves up with bonus payments whilst losing our hard earned savings. Then get paid huge sums of money when they resign, if they were workers they would lose their "dole" for their throwing their hand in. instead they get more of our savings in "compo" to ease their boo hoo for losing their Life of Reilly tickets. Send for Rosepierre he would sought them out...........
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