The Director General of Fair Trading has given a final warning to
the City that, unless greater competition is introduced, he will
refer the subject of underwriting practices to the MMC. In the
meantime, the tendering of sub-underwriting continues to lead to
savings for equity issuers
"...failure to introduce greater competition would
result in an investigation by the MMC."
The Director General of Fair Trading
The development of competitive sub-underwriting has
been inspired largely by the threat of a referral of underwriting
practices to the MMC by the Director General of Fair Trading, Mr
On 2 July 1997 Mr Bridgeman issued a final warning
that failure to introduce greater competition would result in an
investigation by the MMC.
Mr Bridgeman said that he was still not satisfied
that there was sufficient commitment to open up the market for
underwriting services to vigorous competition and that he was
continuing to monitor rights issues before making a firm decision
as to whether to initiate more formal action.
Mr Bridgeman's preference appears to be for
alternatives to underwriting of rights issues, such as deep
discounting and book building. He has previously delayed making a
reference to the MMC because he had seen signs of change, such as
institutional support for deep discounting and to the fact that a
proportion of sub-underwriting had been put out to tender. Having
analysed the results of 57 rights issues between June 1996 and
March 1997, he has concluded that sub-underwriting fees have been
only marginally lower since the introduction of tendering and that
excess profits remain.
If sub-underwriting had become truly competitive,
he would have expected a much greater variation of fees, reflecting
the varying degrees of risks involved. He has also noted that where
the tendering has been used, only a percentage of the underwriting
commissions have been subject to tender, thus diluting the possible
Finally, he also believes that the structure of a
tender could be made more competitive. Presumably he is referring
to the fact that many of the tenders have only been available to
the existing institutional shareholder base in the companies
concerned, rather than being made more widely available.
Competitive sub-underwriting in practice
Subsequent to the article on competitive
sub-underwriting of equity issues in the February edition of the
Corporate Finance Bulletin, Cameron McKenna have advised a number
of issuers on rights issues in which a competitive sub-underwriting
has been employed.
Cameron McKenna have advised two issuers on rights
issues where 50% of the underwritten shares were available for
tender in the competitive sub-underwriting. In both cases, the
commission which was payable to sub-underwriters for the shares not
subject to the tender was 1.5% of the gross subscription proceeds.
The average sub-underwriting commission in one of the issues was
reduced to 1.22%, leading to a saving in the total commissions
payable of £73,000. In the other issue, the average
sub-underwriting commission achieved was 1.05%, resulting in a
saving in the total commission payable of over £200,000. In both
cases, the underwriting commission payable to the primary
underwriter was reduced pro rata to the average sub-underwriting
Cameron McKenna has also advised an issuer on what
was believed to be a first of its kind, a competitive tender for
all of the shares for which sub-underwriters were sought. Tenders
were received for more than 100% of the sub-underwriting offered.
The sub-underwriting commission payable for these shares was
reduced from 1.5% to 0.47%. The primary underwriting commission was
reduced pro-rata. The total savings to the issuer as a result of
the tender was approximately £460,000.