ASX bookbuild plan raises hackles

ASX BookBuild, a new software system that promises investors transparent pricing on initial public offerings, secondary share sales and block trades, is worrying bankers concerned their fees and leverage over such transactions may diminish.

Equity book builds, usually done in private by the investment bank soliciting demand from investors before setting a price, will be able to be done in public, on market, by brokers from October 8.

The ASX says BookBuild is aimed at companies with market values of less than $300 million who receive scant attention from the investment banks.

But the timing of the ASX BookBuild is less than ideal for the investment banks. They are struggling to get companies to issue shares even as the S&P/ASX200 Index has gained 19 per cent in the last 12 months. 

In 2010, Australian and New Zealand equity offerings totaled US$27.1 billion. By 2012 they had dropped to $14.6 billion. So far this year they are $12.96 billion, according to Bloomberg data.

A drop in share sales means less revenue for the equity capital markets departments of the banks. That means bonuses are pared and head counts are examined. Supporters of the ASX BookBuild say their process will help stimulate the equity capital raising market -- good for the bankers and their clients, the companies.

“We intend to try and use it,” says Stuart Foster, founder and chief executive of Foster Stockbroking. “Capital raising has never been transparent. This process makes it so but it may take the market time to digest it and understand the intricacies associated with it.”

Investment bankers are concerned that their role as managers of share sales will change from one of central importance to a more peripheral administrator. Bankers are also worried about the effect ASX BookBuild will have on fees.

Australian and NZ equity and rights offerings fees are 5.7 per cent this year. US equity-offering fees are 3.8 per cent.

“We put our balance sheet at risk to solve a company’s problem,” says one senior equity capital markets banker, who spoke on condition of anonymity.

Under the ASX bookbuild, investment banks continue to manage share sales. The fee begins at $25,000 for share sales up to $25 million, but then rises to almost $2 million for sales of more than $450 million. Participants pay an allocation fee. 

“The fees are wrong by a factor of 10,” says the banker.

“That’s a bit rich coming from a banker,” says Ben Bucknell, chief executive of On-Market Book-Builds, which developed the ASX BookBuild software.

All share sales, regardless of size, says Bucknell, cost $25,000. When a company chooses to take a price improvement a scale of fees applies, he says.The scale of fees is only payable out of part of any increase in net proceeds, a company will pay no more than $25,000 using ASX BookBuild for a deal of any size, according to Bucknell. 

Bucknell, a former investment banker, says the system is not about fees but getting a better price for a company that sells stock.

In the past three years, the average weighted discount for all Australian share placements has been 8.8 per cent, according to On-Market BookBuilds. It says about 80 per cent of the cost of an Australian share placement is the discount to the preceding share price with investment banking fees accounting for the remaining 20 per cent.

A company announcing a share sale will be able to set the volume of stock it wants to sell and the price in light of all of market demand. Investors can bid for stock by paying what the company wants or by offering a premium in an effort to secure an additional allocation of shares.

Investment bankers say such a process opens the share registry to potential hostile shareholders. Bucknell says such concerns are groundless because the system has an investment cap that can be used to prevent anyone taking a large shareholding in the raising.