BREAKINGVIEWS-Bankers’ share sale boom hints at fragile recovery

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

LONDON, May 27 (Reuters Breakingviews) - Tuesday was a busy day for European equity capital market bankers. They rushed to place shares on behalf of clients like Saint Gobain, which offloaded $2.7 billion of stock in Swiss chemical group Sika through a so-called block trade. The return of these risky transactions, and surge in secondary share sales, send a warning over the durability of the recent stock market recovery.

Block trades allow institutions, often a private equity firm or large company to quickly sell shares they own in another business. Banks compete to buy the shares directly at a discount to the secondary market price, and then place them with investors, usually leaving them exposed if shares can’t be sold at that price.

The Sika deal, however, shows that block trades are not always straightforward. Citigroup priced the shares to investors at 168 Swiss francs, a discount of 5.5% on Tuesday’s close. Yet the bank did not tell investors that it had placed all the stock on Tuesday evening, and rival bankers speculate that it was left holding part of the block. On Wednesday morning, the shares fell as low as 166 Swiss francs, potentially meaning a loss for Citi, if it had been holding the shares. Since then, however, Sika’s stock price has bounced back to 169 Swiss francs.

The pandemic aftermath should be a fertile one for this risky business. Companies may want to sell stakes to raise cash to pay down debt or fund acquisitions. And markets are buoyant, thanks to greater certainty over earnings. While some companies are still raising fresh capital, such as Infineon Technologies’ 1 billion euro capital increase on Tuesday, equity market business is shifting towards secondary share sales. Some 4 billion euros of such deals were completed in Europe on Tuesday alone. In the United States, French group Sanofi announced plans to sell $8 billion of Regeneron Pharmaceuticals stock.

The flurry of activity suggests, however, that the stock market recovery may be short-lived. The rush to sell implies that companies agree with Deutsche Bank Chief Executive Christian Sewing, who said on Tuesday markets were too optimistic about a recovery. Thanks to a flood of central bank support, equity markets are brushing off high unemployment and contracting western economies. Depressing economic fundamentals may soon shut the block trade window.

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- French construction group Saint Gobain sold down $2.7 billion worth of shares in Swiss materials group Sika on May 26. The deal was underwritten by Citigroup. Sika shares temporarily fell below the offer price of 168 Swiss francs on May 27. At 0910 GMT, however, Sika stock was trading at 169 Swiss francs ($174).

- On May 26, Germany’s RAG-Stiftung sold around $200 million of shares in Stadler Rail, cutting its stake to 5%. In morning trading on May 27, the stock was trading at almost 40 Swiss francs, above the offer price of 38 Swiss francs.

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Editing by Neil Unmack and Karen Kwok