Editor’s note: This is general educational information about how the price of a New Zealand initial public offering is set through a bookbuild. It is not investment advice and does not describe any current offer. The definitions, figures and timings below come from the official offer documents and exchange guidance listed at the end.
Analysis: a bookbuild is a discovery process wrapped in a discretion
Comparing the bookbuild with the other price-setting process the New Zealand government runs is the fastest way to see what it is not. In a New Zealand Government Securities tender, the allocation rule is mechanical and published: allocations for each maturity are made in ascending order of yields bid, and for nominal bonds and Treasury bills the issue yield for each allocation is the relevant yield bid. Given the bids, the outcome follows. In a bookbuild, given the bids, the outcome does not follow. The seller sets the price at its discretion and allocates on a list of factors that is explicitly not exhaustive.
That is not a criticism of either design. A sovereign selling a fungible bond line to registered dealers wants a mechanical rule because it repeats the transaction every week. An issuer selling equity once wants a register, and a register is a choice about who owns the stock, not only about what they will pay. But it means the phrase price discovery carries a different weight in the two settings. In a tender, the price is discovered. In a bookbuild, the price is informed.
The second thing the structure explains is why the pricing window is so short and so leak-sensitive. NZX’s halts guidance lists a bookbuild for a private placement as a circumstance where an issuer may appropriately request a trading halt, because in such placements there is a risk of material information leaking ahead of an announcement. In an initial public offering there is no quoted price to protect, but the same exposure exists in the other direction, which is why the Mighty River Power document warns that significant adverse developments occurring before commencement of the bookbuild would be advised to investors, and why the whole institutional process ran across two days immediately before pricing.
What the offer document establishes is the boundary of the seller’s discretion, not the price. It establishes the range, that the range is non-binding, who sets the final number, when, and what factors bear on allocation. What it cannot establish is the number itself, or the demand behind it.
The specific things worth reading in any bookbuild-priced offer are the sentence that says whether the final price may be set outside the range, the identity of the party holding the pricing discretion, the gap in days between the retail close and the pricing announcement, and whether the allocation factors are stated as constraints or merely as influences. In the Mighty River Power document that last distinction was written into the text: the allocation policy would be influenced, but not constrained, by the listed factors.
What the documents say
An indicative price range in a New Zealand offer document is not a forecast, a valuation or a promise. It is a boundary that the seller is free to cross in either direction, and the document usually says so in the same paragraph that introduces it. The number that matters is set days later, after retail applications have closed and institutions have bid, and in most New Zealand offers it is set by one party at its sole discretion. Understanding what a bookbuild does, and what it does not do, starts with reading that sentence carefully.
What a bookbuild is, in an offer document’s own words
The Mighty River Power offer document defines the term directly. A bookbuild is the term used in initial public offerings to refer to the process of collating demand for shares from eligible retail investors who apply for shares in the offer and demand for shares at various prices from institutional investors who bid for shares. The bookbuild process collates the demand of the parties that want shares, how many shares will be sold and the price applicants bid, and the information collated is then used to assist with the determination of the pricing and allocation of shares.
Two things follow from that definition. Retail demand is part of the book, even though retail applicants never state a price. And the output of the book assists a determination rather than producing one automatically.
Access is intermediated. Participants can only bid into the book for shares through the Joint Lead Managers, who provide bidding instructions to invited participants. They may bid for shares at specific prices, and they may bid above, within or below the indicative price range.
The range, and how little it binds
The Mighty River Power indicative price range was $2.35 to $2.80 per share. The document states that the range may be varied at any time by the Crown, that the Final Price may be set within, above or below it, and that the Final Price would be determined by the Crown in its sole discretion after the close of the General Offer and the Institutional Offer.
The timetable shows how compressed the pricing window is. The General Offer opened on 15 April 2013 and closed on 3 May 2013. The Institutional Offer and bookbuild process ran on 7 and 8 May 2013. Pricing was announced on 8 May 2013. Allocations were expected on 10 May 2013, trading on a conditional settlement basis was expected to begin on the NZX Main Board on 10 May 2013, and the allotment date and last day of conditional trading was 14 May 2013, with normal trading expected from 15 May 2013.
Retail applicants therefore committed money before the price existed. That is why they apply for a dollar amount rather than a number of shares, with the application amount divided by the Final Price after the fact, rounded down to the nearest whole share. Once set, the Final Price cannot be changed.
The offer document works through the arithmetic with a worked table. At a Final Price of $2.35, $2.80, and two intermediate points of $2.50 and $2.65, an allocation of $2,000 worth of shares produces 851, 714, 800 and 754 shares respectively. Same money, different share counts, and the applicant does not choose which.
What the book is used for besides price
Price is only one of the two outputs. The allocation policy in the Institutional Offer was to be determined by the Crown after consultation with its advisers and the company, with no assurance that any participant would be allocated any shares or the number bid for. The policy was to be influenced, but not constrained, by factors including whether the participant was a New Zealand institution managing significant investments on behalf of New Zealanders including KiwiSaver or superannuation, or a participant representing collective interests in New Zealand such as Maori trusts, the price and number of shares bid for, the timeliness of the bid, and any other factors the Crown considered appropriate.
That last clause is the point. A bid is a price signal and a claim on stock at the same time, and the two are weighted by the seller rather than by the book.
Other blocks can also sit outside the price mechanism entirely. A pool of up to $65 million of shares, representing approximately 1.8 per cent of the shares on issue, was reserved for iwi with unsettled historical claims under the Treaty of Waitangi. Applications from participating iwi were not scaled and received a guaranteed allocation, all shares transferred under that arrangement were transferred at the Final Price, and anything not taken up was made available for allotment under the General Offer or the Institutional Offer as the Crown determined.
Bookbuilds outside an initial public offering
The same technique is used for secondary raisings, and NZX’s Capital Raising Guidance Note maps where. A placement is described as an issue of equity securities to new or existing investors at an agreed price, which may be determined by the issuer beforehand or determined through a bookbuild or similar process. A traditional renounceable rights issue may have a shortfall bookbuild, on-market trading of the rights, or a combination of both. An accelerated renounceable entitlement offer usually offers securities to institutional holders first, and holders who do not take up their rights may sell them through a renunciation feature or receive value through a bookbuild if a premium is achieved.
In a simultaneous accelerated renounceable entitlement offer there is no institutional bookbuild and instead a single shortfall bookbuild at the end. In an accelerated non-renounceable entitlement offer the rights are not renounceable, there is generally no shortfall bookbuild, and where one is included the proceeds of any premium go to the issuer rather than to the holders who did not take up their rights.
The guidance note also states the principle it measures those structures against: the rights to subscribe for new capital in a capital raising should belong to existing holders, either to be exercised or sold, and placements and accelerated non-renounceable entitlement offers do not reflect that principle.
