大象传媒

Bradford revisited

• Robert Peston
• 4 Jun 08, 01:48 PM

The insurers and pension funds may be revolting. A number have contacted me to express concerns that the 拢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 拢1.2bn at the end of December, but these are being valued at just 拢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 拢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 拢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 拢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.

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