Significant shareholders in listed companies may wish to consider sell downs of all or part of their shareholding from time to time, for example a private equity house exiting an investee company where it participated in the original IPO, or where a founder shareholder decides to sell off shares to realise funds (in March 2018, for example, Charles Rolls, one of the founders of Fever Tree Drinks plc, realised £83m by selling a 2.6% stake in the company).
Whilst a sell down benefits the exiting shareholder by realising cash, the transaction may also assist the company itself, perhaps meeting demand for shares after a results announcement and/or diversifying the company’s shareholder base.
Typically, a significant shareholder will engage the Company’s broker to run the process for them, especially if following the IPO, there are lock-in and/or orderly market arrangements in place with that broker, restricting the sale of their shares.
The documentation involved in a sell down is not extensive or onerous, however much pre-planning is required, and it is important to be organised to enable best execution and flexibility.
Equity markets will need to be watched and considered, the company’s recent trading performance analysed, and relevant “windows” for the execution of a sell down identified and monitored (including, perhaps, by reference to a company’s results and/or MAR closed periods, or when the seller might otherwise be in receipt of inside information). The process is similar to an accelerated book build for a placing of new shares, with five main structures by which an accelerated sell down can be executed:
- a “best efforts” sell down launched by the broker within a price range, but without having “wall-crossed” any investors and without any underwriting.
- a “wall-crossed” pre-marketing exercise by the broker, providing comfort to the selling shareholder on the price and size and generating momentum ahead of the transaction, with the transaction being carried out on a “best efforts” basis.
- an underwritten sell down, with underwriting by the broker, but with no pre-marketing.
- a pre-marketed underwritten sell down, with a “wall-crossed” pre-marketing exercise which is used to scope an underwriting agreement with the selling shareholder.
- an auctioned block to institutions which is underwritten, with no pre-marketing.
Preparation in advance of the sell down is required, including, where necessary, the KYC “on-boarding” process by the broker, and drafting and agreeing a block trade agreement between the seller and the broker. Where wall-crossing is involved, this is typically done within two days of the anticipated execution date, with targeted investors identified, and a wall-crossing script prepared. Typically, target investors will not wish to be taken inside for more than 2 days.
A final feedback assessment from wall-crossed investors and a “go/no go” decision will be taken on the day before, with the pricing and allocation then finished and then the sell down completed after the markets close, and before markets open on the trade day. Settlement and closing of the transaction is on the usual T+2 basis. Regulatory notifications and announcements will need to be made.
Pre-marketing is not necessarily a requirement for a successful transaction, but has material benefits for execution, helping to ensure that the offering will be successful and at a price attractive to the seller.
Whilst the size of the offering is set by the seller’s requirements, this will be in discussion with the broker, and the pricing is determined by the accelerated sale process, at a discount to the share price typical for the size of offering (with the discount averaging 6 per cent., but with examples either side of the average). Lock-up of at least 90 days for selling shareholder’s remaining shares is customary, and will be important to give comfort to the market on any future supply (particularly if there are to be further phased sell downs). A selling shareholder would expect to pay commission on the sale at approx.1 per cent. (more if there is an underwriting element).