$4bn shares to hit market as vendors exit

MORE than $4 billion worth of shares could flood the sharemarket in the next six months.

Possible selldowns.

MORE than $4 billion worth of shares could flood the sharemarket in the next six months as escrow periods lapse on a range of big-ticket floats from the past year — such as Nine Entertainment and Veda — prompting warnings from fund managers about the impact on share prices and the reputational risk for the companies involved.

But bankers, enjoying the bumper run of floats after a dearth of deals in recent years, argued the market would be able to handle selldowns as there was strong demand for “liquidity events”.

Escrow periods on a dozen initial public offerings are due to expire between August and November, including share blocks of more than $2bn during the annual reporting season in August.

An additional 10 floats are subject to escrow periods that will expire in August next year.

Escrow periods prevent owners of companies floating from selling their shares until a certain date after financial results are released. Many of the float promoters over the past year have been private equity firms that have been starved of opportunities to exit their investments because of the volatile sharemarket and poor demand for trade sales.

While historically private ­equity firms have made clean exits from companies during IPO processes, the disastrous float of department store Myer by private equity firm TPG Capital in 2009 has led to many keeping “skin in the game” for periods after IPOs.

“This is a new experience for the Australian market because we have historically had full exits from private equity investors. Myer changed all that,” said Colonial First State head of Australian equities, Marcus Fanning.

Another big Australian fund manager, who declined to be named, said: “It’s almost like a whole new raft of IPOs. So there will be pressure on the prices of some of these stocks. The materiality of the escrow will be very ­important.”

The potential vendor sales also come as the market is set to be flooded with a new round of fresh offerings, including the big-ticket Medibank Private and Healthscope floats.

“The market is very crowded. People looking to place the escrowed stock will be competing with new floats,” said Sirius Fund Management managing director Kieran Kelly. “There will be appetite at a price. But I think some of the sellers will be surprised at the discount that will be demanded for some of these sales.”

Mr Kelly added: “In days gone by the ASX took a much tougher line on this. The escrow provisions aren’t tough enough. Private ­equity vendors are getting high multiples on these floats with relatively short escrow periods with limited conditions.”

The biggest focus is on Nine Entertainment, where US-based hedge funds Apollo and Oaktree control a combined 36 per cent, or about $720 million worth of stock.

Apollo has 22 per cent of the register while Oaktree holds a 14 per cent stake. The shares have consistently traded above the $2.05 issue price. Their shares are escrowed until the release of Nine’s full-year results in August.

Also coming out of escrow is Pacific Equity Partners’ 63.5 per cent stake in credit information provider Veda.

In February, one of the investors that helped restructure Veda’s debt, Intermediate Capital Group, sold its entire stake in the then newly listed company for $36m after the group’s profit result. At the time, Veda’s chief ­financial officer, James Orlando, said PEP could follow suit with a share sale after August. Veda shares listed at $1.25 and closed on their first day at $1.75. They still remain above the $2 mark.

PEP has owned the business for more than six years but has previously indicated it did not want to sell all of its Veda shares in one trade. But as one fund manager put it: “A lot of these assets are end of life for the funds. There is lots of liquidity out there and the multiples are attractive, so why hang on?”

Australian Foundation Investment Company managing director Ross Barker said vendors should think twice about selling shares simply to cash in.

“If investors think promoters are dumping stock, that can’t be taken positively. But if they can convince investors they are doing it for the right reasons, that is a different thing,” Mr Barker said.

“The reason for the sale need to be to improve liquidity rather just be simply taking money off the table.”

But Mr Barker noted that “just because the escrow period finishes doesn’t mean the stock will be sold”, despite many of the companies trading above their issue prices.

Colonial First State’s Mr Fanning said the impact of any vendor selldown could not be accurately measured simply by looking at the size of the block that could be traded.

“When you are looking at the size of the block, the statistic that is more relevant is average days turnover to contextualise the size of the ask in terms of the liquidity challenge,” he said.

He also noted that the expiry of the escrow provisions could provide an ideal opportunity for investors to get more exposure to quality business, especially where the companies had met prospectus forecasts and had solid growth prospects.

“This can also be an opportunity to access liquidity. The quality of the business and its earnings will be fundamentally important to the outcome. Woodside is an example of that,” Mr Fanning said, referring to the recent selldown of Shell’s stake in the Australian oil and gas giant, which was a success.

Robin Bishop, the head of Macquarie Capital’s Australian arm, brushed off the potential selldowns as an issue, saying the market should be able to absorb any selldowns. “You can see how well the market absorbed the Shell selldown in Woodside — it hardly skipped a beat,” he said.

Senior UBS banker and co-head of mergers and acquisitions Greg Peirce agreed, saying institutional investors were keen for “liquidity situations”.

“I think some of the blocks that will invariably come out actually offer a pretty good opportunity for them to get a liquidity event, so my sense is I don’t think blocks are likely to harm the market,” he said. “What’s more likely to harm the market is if you get a float that goes very bad, that’s what we sort of worry about ... we’re very ­focused on diligence to make sure that doesn’t happen.’’

Another stock in focus will be Dick Smith Holdings, given its shares are trading well below the $2.20 issue price and it is 20 per cent-owned by private equity firm Anchorage Capital Partners. The company is on track to meet the $80.8m earnings target, but has fallen from as high as $2.40 earlier in the year to below $2.

Given the poor share price performance, some institutional investors in the company have been lobbying some of the group’s non-executive directors — which include former Woolworths numbers man Bill Wavish — to not pay some short-term incentives to the management team that are available under the terms of the prospectus.

The Frank O’Halloran-chaired insurance broker Steadfast is another in the spotlight with the vendors and network brokers holding $270m of stock.

Private-equity group Crescent Capital Partners and management have a 17.6 per cent holding in travel insurance group Cover-More, which comes out of escrow after financial-year 2014 results.

The owners of foreign exchange broker OzForex still hold 20.3 million shares that will come out of escrow at the end of September.

OzForex shares shed almost 20 per cent of their value in late May after it reported a drop in statutory reported full-year earnings and lower than expected new client numbers. But the shares are still well above their $2 issue price.

Fund managers say there will be pressure on some stocks as vendors seek to exit after company floats