British Government Decides to Proceed With Sale of BP Stock
The British government said Thursday that it would go ahead with the $12-billion British Petroleum share offer, which had been threatened by the worldwide collapse of share prices over the past two weeks.
The decision was announced by Chancellor of the Exchequer Nigel Lawson, who said the Bank of England will help stabilize the stock price through share buybacks, if needed. The collapse of stock prices threatened big losses for brokers in Europe and North America, since they guaranteed the British government a price prior to the market’s plunge.
Analysts called the share launch one of the biggest political and economic dilemmas ever to confront Prime Minister Margaret Thatcher’s government. The potential for huge brokerage losses threatened to send already-volatile British and world financial markets reeling once again, but there was strong political opposition to giving in to the brokers who wanted it canceled after the agreement had been made.
The actions announced by Lawson appeared to strike a compromise position, by selling the 31.5% remaining government stake in British Petroleum Co. PLC and issuing new shares while also vowing to stabilize the BP stock price.
Lawson told Parliament that the Bank of England was prepared to buy back the new BP shares at 70 pence ($1.19) each for at least the next month but not for more than two months.
The central bank would not resell any shares that it purchased for at least six months, unless the market price for the shares rose to 1.20 pounds ($2.06), he said.
That is the initial installment due on the shares being sold today. The government is selling the new shares at 3.30 pounds ($5.64) each, but buyers will pay for them in three installments.
Lawson told Parliament: “In reaching that decision, I have taken full account of the views expressed by BP, by (N. M.) Rothschilds on the underwriters’ behalf and by the Bank of England in their assessment.”
U.S., Canadian, British Japanese and European finance houses had agreed to underwrite the sale and stood to lose in excess of 1 billion pounds ($1.72 billion) because the shares would be sold at the launch offer 3.30 pounds ($5.64).
The worldwide slump in stock prices meant BP was being traded Thursday at only 2.62 pounds ($4.50), killing investors’ incentive to buy the stock. But Lawson said that the buyback arrangement through the Bank of England was designed “to ensure an orderly market.
“I would like the House to be quite clear about the objectives of my decisions,” Lawson told Parliament.
“First, and most important, to allow taxpayers to secure the full proceeds of the BP sale to which they are entitled. Second, to ensure that there are orderly aftermarkets in BP shares. Third, to make quite sure that the sale does not add to present difficulties in world markets.”
‘Dogma’ Criticized
Lawson added that it was not his “objective in any way to bail out the underwriters, whether in this country or elsewhere.”
Opposition members of Parliament immediately attacked Lawson’s decision, which ended more than a week of suspense about what the government would do in light of the sharp falls in the stock markets.
“Sad fact is that government driven by dogma are determined to drive through this sale and (place) Tory (Conservative) Party interest before true national interest” said John Smith, a member of the Labor Party. He attacked what he called the “curious buyback arrangement” and asked whether taxpayers would have to pay its cost.
Analysts said the buyback arrangement means that underwriters would not lose by buying shares at the higher, artificial price.
“By proceeding as I have indicated, the city (of London) will uphold its reputation as the world’s leading financial center,” Lawson said. Analysts’ initial reaction was one of confusion at the terms.
“This is much better than most people in the city expected. Individuals and underwriters will suffer losses, but not as great as feared,” he added. The sale of BP shares was seen by Prime Minister Thatcher as the “jewel in the crown” of her ambitious selloff of state-owned firms, which is intended to turn millions of ordinary Britons into stockholders.
The BP sale, which will raise about 7.2 billion pounds ($12 billion), is the biggest of its kind in Europe but was doomed by the dramatic slump in world stock prices that began nearly two weeks ago.
The government’s adviser in the sale, N. M. Rothschild and Sons Ltd., had announced Wednesday that the offer had been “undersubscribed.” Only an estimated 250,000 people applied to buy shares, after more than 6 million had registered an interest in buying them before the crash.
Risk Big Loss
Wall Street analysts predicted that pushing ahead with the offering as initially planned would cause havoc in world financial centers, including the New York market, since several leading U.S. brokerage firms had joined the underwriting group.
Shearson Lehman Bros.; Salomon Bros.; Goldman, Sachs and Co., and Morgan Stanley Group Inc. were heavily committed to the underwriting--seeking to handle 480 million shares. Analysts estimated that they were risking losses of $600 million.
Underwriters guarantee the price at which a stock will be sold on the open market. They receive a percentage of the price for handling the risky transaction.
The British government technically had nothing to lose from the setback because the investment banks that underwrite the deal must take the shares at the agreed price if no other buyers can be found.
But multimillion-dollar losses at leading brokerages houses would compound losses brokers already suffered in the big market collapse, and further destabilize markets, possibly even leading to insolvencies. Moreover, a flood of low-priced BP shares onto the stock exchange could hurt an already unsteady market.
The share offer represents the British government’s remaining 31.5% stake of BP plus 1.5 billion pounds ($2.6 billion) in new shares. The plan would raise 4 billion pounds ($6.8 billion) over the next three years for the government.
