Further developments on competitive sub-underwriting of equity issues

United Kingdom
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 John Bridgeman.

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 savings.

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 commission.

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.