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Block trades: a short walk to price discovery

Prosus’ monster block trade is a reminder that the old toolkit takes some beating. The listed arm of Naspers, the South African internet group, sold a 2 per cent stake in Chinese tech giant Tencent this week, raising $14.6bn. Shares went on the block at 5pm Wednesday Hong Kong time and were all placed within eight hours.

The accelerated book build, which entails “wall crossed” soundings a day in advance in order to suss out demand and price, is a perennial favourite with anyone looking to sell shares with minimum cost and price disruption.

Polish ecommerce group Allegro completed a $1.2bn deal last month, enabling financial sponsors to shave off post-IPO holdings. Governments have done likewise, selling down residual stakes in privatisations or holdings acquired through bank bailouts — think Lloyds or RBS in the UK. 

More will come in the wake of a rash of initial public offerings. Once lock-up periods end, vendors will chip away at residual holdings. Buoyant markets also encourage sellers. Private equity vendors tend to lean towards auctions, whereby banks bid for lots they aim to sell at a higher price, capturing the spread. Unsurprisingly, banks prefer the risk-free security blanket of placing shares directly with institutions.

The fee is smaller than many other equity capital market activities but the workload is lighter and leaves bank balance sheets clear. Non-disclosure agreements prevent Prosus and its advisers from saying how much was paid, although a back-of-the-envelope sum suggests under $50m spent on fees, foreign exchange and stamp duty. No marketing or prospectus is produced.

Lex chart showing Annual block trade proceeds by region

A one-off block sale avoids the overhang caused by a gradual dribble of shares on the open market. But not always. Naspers, whose 2001 purchase of a stake in Tencent for $32m ranks as one of history’s shrewdest investments, can afford not to quibble. The 5.5 per cent discount to the last day’s share price is a whisker below what Allegro achieved. Still, the US government, opting to sell shares in Citibank it was lumbered with after the bailout, offloaded its final holding at a 1.25 per cent discount. Better deals can be possible.

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