Home Hedge Funds Why the year’s biggest trade has divided the street

Why the year’s biggest trade has divided the street


Now, this was a sale that was transparent and well flagged for weeks. Fast money hedge funds had positioned accordingly by shorting Woodside shares ahead of the sale and expected to cover 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 at all.

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

Billion-dollar day

This is where things got interesting. The hedge funds bid aggressively into the transaction and offers ranged from $28.65 to $30.19 per share.

But, a concentrated group of large buyers clustered their bids around $29.15 and that is where the block sale was eventually priced.

That level was towards the lower end of the range of bids, yet represented a seemingly impressive 3.4 per cent discount to the last traded price. This discount is also the second smallest for a block trade over $1 billion since 2005.

But the hedge funds were apparently left furious as they had received a far slimmer order of shares than anticipated.

They had bid aggressively above the clearing price, but had been scaled back to the point where they received next to no stock. All things being equal, significant scaling is a sign of strong demand, which begs the question – why wasn’t the price moved higher if the demand was so strong?

Woodside Energy’s first actual trading session brought with it more evidence of strong demand as Woodside shares gained over 5 per cent during a session when a weak oil price might have otherwise weighed on the stock.

In fact, some believe the same bidders at $29.15 that made a quick-fire 9 per cent gain, may have been buying in large blocks at just below $32 the following day, and are now sitting on 20 per cent gains on the block investment given the share price has since traded up to $34.74.

The insinuation is that the sale worked out favourably for a small group of large investors who were able to get access to a large block of shares at a price that did not reflect the true demand.

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

Back of the queue

Hedge funds tend to be at the back of the queue when a company, conscious of having a stable register of long-term holders, raises money. But in this instance, the counterparty was a group of sellers after the best price.

What would those foreign holders have to say? Well, there’s a feeling among some that remain BHP shareholders that the whole arrangement worked to their detriment at the start.

Their in specie distribution that they were eligible to claim was to be sold on their behalf over an extensive time frame and at a price at which they had no control. But there’s a recognition the objective was to get the cash back, not make money.

This meant that even though they were sensitive to the price, they were treated as price insensitive. And that is why there’s a sense of unease among some in the market that those disengaged foreigners lost out at the expense of large, important institutions.

JPMorgan declined to comment. But sources close to the bank pointed to the historically tight discount achieved for such a large sale as an indication those foreign shareholders got a good result.

BHP, meanwhile, also seems satisfied enough that its foreign shareholders were well looked after. However, the fact that there’s such division about the outcome shows there is still a greyness when it comes to block trades, how they’re conducted and how decisions around price and allocation are determined.

While sharemarkets tend to be open and transparent, block trades which involve bilateral transactions between a large buyer and seller are opaque. It is a function that is at the heart of successful brokering franchises, but also one the regulator has said it is watching closely.

The reality is we will never really know how these block trades work, and who is winning or losing out. But it remains one of the last vestiges, in an increasingly dis-intermediated world, where brokers and their lucrative clients can play out their power games.

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

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