Investors Tell Private Equity We Just Feel Used

(Bloomberg Gadfly) -- Can't live with you, can't live without you. The awkward relationship between private equity and the stock market is under fresh strain following an attempt to take specialist British lender Shawbrook Group Plc back into private ownership. Shawbrook's board has handled the situation poorly.

The company's private-equity backer Pollen Street Capital Ltd. sold 25 percent of the business in an initial public offering nearly two years ago at 290 pence a share, taking its holding down to 39 percent in two subsequent placings. The shares were trading at around 266 pence on Friday just before Pollen popped up with a proposal to buy the company back in partnership with fellow financial sponsor BC Partners.

As a listed company, Shawbrook has had a host of troubles: regulation has shifted against its business model; last year the company revealed improper lending to small business. No doubt some shareholders are fed up and want a cash exit.

Pollen is offering 330 pence a share, and Shawbrook investors would get to keep a maximum 3 pence dividend. It's a 29 percent premium to the stock's three-month average. That usually wouldn't cut it, even if it would offer a way out for the desperate.

The board's handling of all this has been clumsy at best. Directors rightly rejected an initial low-ball offer, pitched at a 20 percent premium. But then they got sucked into talks and opened the books to the current proposal. Shawbrook probably thought that shareholders would be grateful it was facilitating a deal. Instead, some major institutional investors said: you must be joking.

So the board is left in a very embarrassing position. Having taken soundings, it has formally rejected Pollen's proposal. But having allowed due diligence, it has sent the message that the price is right.

The group appears to be caught up in a longstanding clash between private equity and institutional investors. The latter don't like to be seen to be taken advantage of. They have been embarrassed by private equity before, for instance the float and buyout merry-go-round at U.K. retailer Debenhams Plc. In this case, some could be forgiven for not wanting to sell Shawbrook back to financial sponsors so quickly having made so little money.

Right now, Pollen and BC Partners have the advantage. The credibility of the Shawbrook board is weakened. If the bidders formalize their offer, this would only need acceptances of 12 percent of the register to give them control, and a further 25 percent to enable them to de-list the company. Shareholders who think Shawbrook is worth more would have to continue the journey with hard-to-trade unlisted shares.

This situation could have been avoided if the board had denied due diligence in the face of an offer that's hardly generous based on where the shares have been trading. Sure, a minority of Shawbrook shareholders would have screamed that the company was depriving them of an offer. But the board would only have been doing its job properly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.