What a Block: Why the Year’s Biggest Trade Divided the Streets

This was a sale that was transparent and well marked for weeks. Quick money hedge funds had positioned accordingly by shorting Woodside shares before sale and expected to hedge their position when the shares were made available to buy.

BHP in turn appointed JPMorgan to handle the sale of those shares on behalf of the foreign holders and the US investment bank wasted no time.

Before the first day of trading for the newly merged Woodside Energy entity, JPMorgan the full block of 38 million shares launched through an open tender block trade.

Day of a Billion Dollars

This is where it got interesting. The hedge funds bid aggressively on the transaction, offerings ranged from $28.65 to $30.19 per share.

But a concentrated group of large buyers bundled their bids around $29.15 and that’s where the block sale ended up being priced

That level was at the lower end of the bidding range, but represented a seemingly impressive 3.4 percent discount off the last traded price. This discount is also the second smallest for a block transaction of more than $1 billion since 2005.

But the hedge funds were apparently outraged because they had received a much smaller order of shares than expected.

They had bid aggressively above the clearing price, but had been scaled back to the point where they received almost no shares. All things being equal, significant scaling is a sign of strong demand, which begs the question: Why didn’t the price go higher when demand was so strong?

Woodside Energy’s first actual trading session brought more evidence of strong demand, as Woodside shares gained more than 5 percent during a session when a weak oil price would have weighed on the stock differently.

Some even believe that the same bidders at $29.15 who made a quick 9 percent profit bought large blocks the next day for just under $32, and are now at 20 percent profit on the given block investment. the stock price has since traded to $34.74.

The insinuation is that the sale benefited a small group of large investors who were able to access a large block of shares at a price that did not match actual demand.

And while few in the market have any sympathy for hedge funds that took a beating after failing to close their short trades, their willingness to pay a higher price means it was those foreign BHP shareholders who may have felt deprived.

Back in line

Hedge funds tend to be at the back of the line when a company, aware of a stable register of long-term holders, raises money. But in this case, the counterparty was a group of sellers looking for the best price.

What would those foreign holders have to say? Well, some who remain BHP shareholders feel that the whole arrangement worked against them in the beginning.

Their in specie distribution that they could claim would be sold on their behalf over an extended period of time and at a price at which they had no control. But there is an admission that the goal was to get the money back, not to make money.

This meant that although they were price sensitive, they were treated as price insensitive. And so there is a sense of unease among some in the market that those reclusive foreigners are losing at the expense of large, important institutions.

JPMorgan declined to comment. But sources close to the bank pointed to the historically tight discount achieved on such a large sale as an indication that those foreign shareholders were outperforming.

BHP meanwhile also seems to be satisfied enough that its foreign shareholders were well taken care of. However, the fact that there is such division over the outcome shows that there is still a grayness when it comes to block trades, how they are executed, and how pricing and allocation decisions are made.

While stock markets are typically open and transparent, block transactions involving bilateral transactions between a major buyer and seller are opaque. It’s a feature at the heart of successful brokering franchises, but also one that the regulator has said is closely monitored.

The reality is that we will never really know how these block trades work and who wins or loses. But it remains one of the last remnants, in an increasingly disintermediate world, where brokers and their lucrative clients can play their power games.

* The author owns BHP (and now Woodside) shares.

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