Morgan Stanley gets stuck with TDC block

Morgan Stanley acquired a 7.16% shareholding in Danish telecoms firm TDC last week after failing to sell an accelerated bookbuild – a type of trade so risky that they are popularly known in ECM circles as “widow-makers”.

A week earlier, Citigroup had won and failed to sell all of a block in Centrica, so some bankers expressed surprise that another firm would fall into the trap of bidding so high that that it couldn’t sell the stock on.

Morgan Stanley led a selldown of 128m shares on behalf of private-equity firms Apax, Blackstone, KKR, Permira and Providence after winning the auction on Monday night. The residual holding was 59.1m shares.

The sale by the private-equity owners was expected, but that did not mean that investors would necessarily buy in size. TDC was the subject of a re-IPO in December 2010 when pricing came at DKr51.

Investors are often nervous about buying new names in December, when losses would affect their performance for the year, but the defensive nature of the sector helped to secure buyers. Bankers in the region said investors had turned negative on the company as the stock slumped to DKr42.24 by April 1 2011.

The accelerated bookbuild attempted to place 15.5% of the company – more than 100 days’ trading volume – but came with a discount of just 4%. A week earlier, the Bulgari family had sold a stake in French luxury brand LVMH with a discount of just 3.2%, but that was for stock that represented just four days’ trading volume.

Hedge funds approach an accelerated bookbuild with the aim of monetising the discount quickly. But when the sale is equal to 100 days’ trading in an unloved stock, investors know the shares are likely to drop dramatically in the aftermarket and that means a large discount is needed to attract fast money.

The 4% on offer was simply not enough and Morgan Stanley was only able to sell just over half the shares. Those shares sold were priced at DKr43.40, the bottom of guidance, though the bank is understood to have backstopped the issue slightly below this level.

Inconsistent on risk

Another unsold deal is a further sign of an apparently confused approach to risk that sees some banks more willing to take on overnight risk, with no fees, than longer-term risk with higher fees and more control.

Bankers cite the underwriting syndicate for the planned €1bn rights issues from Fondiaria-SAI and Unipol in Italy. Goldman Sachs is advising Fondiaria, but is not underwriting the deals.

Morgan Stanley, Goldman Sachs and JP Morgan all also initially refused an invitation to underwrite UniCredit’s €7.5bn rights issue, though JP Morgan did participate.

One banker at a second-tier firm said the absence of top-tier firms from some rights issues was allowing him into deals and providing a significant boost to profits for the year. Even a junior role in UniCredit, secured when terms were set, earned one bank €8m.

Yet top-tier firms do not appear to be holding back when it comes to overnight trades – even when deals, such as TDC’s, seem too big to clear.

“With rights issues, if you are afraid of Italy or a sovereign collapse, you are on the hook for often 10 weeks and that kind of risk could lose you €200m–€300m, whereas with a block you are looking at [losing] a few million,” said one senior originator.

A head of syndicate said the reason banks were bidding aggressively in auctions was far simpler. “League tables,” he said. “It is fine in January, but by mid-February top-tier firms need to be at the top end of tables.”

Prior to the Centrica and TDC trades, Citigroup and Morgan Stanley did not feature in the EMEA top 10 and EMEA was the most active region globally.

But Morgan Stanley appears to have been lucky with TDC. Shares have held up in the aftermarket and were changing hands at €43.30 at midday GMT on Friday, while the company will pay a €2.17 dividend in mid-March if the bank holds on to its stock that long.