How much of an accelerated placement's cost never appears on an invoice?
The fee is contracted, benchmarked and argued over. The two larger lines are not payments at all, so nothing in a company's controls is built to see them.
An accelerated placement of 9,500,000 shares cost Ardennes Industries EUR 31,398,889, and 86.50 per cent of that never appeared on an invoice. Only the commission of EUR 4,237,475 left the bank account. The placement discount of EUR 19,475,000 and the EUR 7,686,414 lost to a wall-crossing leak were borne by existing shareholders as extra shares issued, not by the company as cash paid. No accounts-payable control will ever see them.
Three lines, three kinds of object
Ardennes Industries sold 9,500,000 new shares at EUR 40.55 in one evening, against 118,000,000 already in issue, for gross proceeds of EUR 385,225,000. The bill has three lines, and they are not the same kind of object. One is a fee, agreed in advance, paid to a named party and deducted at settlement. One is the price of immediacy, paid to nobody in particular and set on the night within a range the market imposes. One is the residue of a confidentiality process that did not hold.
The placement bill, by line. Percentages are each line divided by gross proceeds.
Item
EUR
Per cent of gross proceeds
Commission
4,237,475
1.100
Placement discount
19,475,000
5.055
Cost of the wall-crossing leak
7,686,414
1.995
Total
31,398,889
8.151
The discount is measured against the last close of EUR 42.60. The leak is measured against the pre-sounding close of EUR 43.45 at a constant discount. The reference fell 1.96 per cent over the window in which a small group of crossed accounts knew the placement was coming and the rest of the market did not, and 185,846 shares — the same 1.96 per cent, this time of the issue — were sold to fund nothing.
The fee is one-eighth of the bill
Of the EUR 31,398,889, exactly EUR 4,237,475 arrives on paper. The rest, EUR 27,161,414, appears on no invoice, against no supplier, and in no ledger line anyone could point at. The commission is 13.50 per cent of what the transaction cost.
That figure inverts the ordinary allocation of effort. The rate of 1.10 per cent was proposed, pushed back on, read by a general counsel and compared with the published range for placements of this size: an average of 1.05 per cent and a central range of 0.70 to 1.25 per cent, from a study of the United Kingdom market published in 2016 covering tranches of USD 190 to 450 million. Ardennes sits above that average and inside that range. It is unremarkable, and it was the only line anybody argued about.
The discount, at 4.6 times the commission, was set on one evening by the same institution being paid the commission — within a range the market imposes, but not at a point the market imposes. The leak, at 1.81 times the commission, was set by how a confidentiality process was run. Together they are 6.41 times the fee. An issuer that negotiates the fee hard and takes the discount as given has optimised one-eighth of its bill.
One caveat, and it points the same way. The bond this issuer sold in the same six months carried a line of EUR 620,000 for legal, rating, listing and roadshow expense. The placement's bill carries no such line, so the total above is understated and the 86.50 per cent is, if anything, slightly overstated.
Why no control catches the rest
The commission left the company's bank account. Every control a company operates on money — a budget, an approval threshold, an accounts-payable review, an external audit — is designed to notice a payment of that kind, and did notice it. The other EUR 27,161,414 never touched the account.
The reason is that an accelerated placement is sized in proceeds and priced at a discount to a reference. The share count is an output. A lower clearing price does not reduce the cash raised; it raises the number of shares issued. The company's cash position is identical in a world with no discount and no leak, because in that world the same money would have been raised by issuing fewer shares. What was transferred was borne by the holders of the 118,000,000 shares already in issue, and it went to the accounts that bought the block and, in the case of the leak, to whoever traded ahead of the announcement.
In shares, the commission is 104,500, the discount 457,160 and the leak 185,846. The placement diluted existing holders by 7.4510 per cent. Undisturbed, it would have diluted them by 7.3159 per cent. Two consequences follow, and neither requires anybody to be careless: no control designed to catch payments will catch this, because it is not a payment; and the party that negotiates the cost is not the party that bears it.
The uninvoiced share is not always the larger one, and the instrument decides it by an order of magnitude rather than by a margin. The same issuer's bond, in the same six months, cost EUR 3,611,953 on EUR 500,000,000, of which only 34.38 per cent was uninvoiced: the invoiced commission of EUR 1,750,000 exceeded the uninvoiced concession of EUR 1,241,953. A bond sits near that boundary and crosses it when new-issue premiums move. A placement does not sit near it at all, because a commission is of the order of one per cent of proceeds while a discount is several per cent of a share price.
What to do with the number
Present the bill in three lines, always, in euros and in shares, with each line naming the reference it was measured against.
Report the fee as a share of the bill and not only as a rate. “Our placement commission was 1.10 per cent” is true and unhelpful. “Our placement commission was 13.50 per cent of what the transaction cost us” is the same fact aimed at the right question.
Before the soundings begin, write down the closing price and have it initialled. The percentage fall in the reference is the percentage of the issue the leak costs. Here that was 1.96 per cent, and it was knowable from two closing prices.
Ask the bookrunner, before the mandate is signed, at what discount it would advise against proceeding, and what discount its last five accelerated placements in the sector struck against the close before soundings began.
Fused into a single figure of EUR 31,398,889, the bill has no owner and generates no action. Split, each line has an addressee. The commission answers to negotiation before the mandate. The discount answers to execution and can be improved at the margin, never eliminated. The leak — 185,846 shares, 1.96 per cent of the issue — answers to procedure, and it is the only one of the three that could in principle have been zero.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
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