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Manchester United IPO Goes Nowhere In Exciting Fashion

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I am the world's worst technical analyst but even I can spot a support level:

Or, as the Journalputs it, "English soccer club Manchester United's stock didn't rise much but didn't fall either as it made its market debut Friday."

This is not the first Friday afternoon where we've played "guess the stabilization strategy of an overhyped IPO," which, God, we need to find something better to do with our Friday afternoons. Last time it was Facebook, and we noticed some things, like that about 43mm shares had traded right exactly at the IPO price, and like that almost all of them traded at the bid. We guessed at the time that most of those shares had been bought by the underwriters, eating into the greenshoe that allowed them to support the deal. But since that greenshoe was 63mm shares, they started the weekend still short some 20mm shares - and when Facebook opened way below the IPO price on Monday, they made shitloads of money.*

Jefferies et al. are determined not to repeat that mistake:**

TSM shows 14,457,385 shares traded at $14.000, with 13,686,927 of those at the bid. So it looks like the underwriters, led by Jefferies/CS/JPMorgan, have bought maybe 12 or 13mm shares. But the greenshoe here was only 2,500,000 shares.***

What's up? There are three possibilities:

  • people or robots other than the underwriters really wanted to buy a lot of Manchester United at exactly $14.00,
  • the underwriters bought in their full 2.5 million shares and then kept buying, as a show of confidence / stupidity / willingness to lose money to support the stock and possibly win future business, and/or
  • the underwriters sold short way more than 2.5 million shares last night.

My guess is that the answer is some combination of all three, but mostly the last two. If Facebook is any guide, non-syndicate bids at exactly the IPO price are not a big source of demand on a shaky opening day, so let's say option 1 doesn't explain more than a couple million shares.****

On to option two. If the underwriters have bought, I dunno, ten million shares for their own account, then that would be rather a bold move on their part. Their fees in this deal seem to have been 6%, or around $14mm, meaning that a 10% drop on Monday would erase all their income on the deal. That sort of drop would be ... not unprecedented. And I, for one, wouldn't want to do a smallish foreign IPO for a financially shaky company with dual-class shares for free or at a loss, even if it did mean that I got to meet Dimitar Berbatov.*****

Given that fact, and the aggressive buying all day to keep from breaking the IPO price, my guess would be that the underwriters knew going in that they'd be buying a lot, and that last night they took on a naked short position.****** That is, they laid out to investors more the 16,666,667 shares they were selling in the IPO, and the 2,500,000 shares underlying their greenshoe overallotment option. If they had sold to investors, say, 21.67 million shares, then they could buy in 5 million shares to support the price today before they'd have to put any of their own money at risk in a long position. The cost of this, though, is that they'd have nowhere to get the extra 2.5 million shares at $14 if, like most IPOs, this one had traded up - so they'd lose money with the stock going up. So that would be a dumb idea. Unless:

"Naked" short sales are sales in excess of the option to purchase additional Class A ordinary shares. The underwriters must close out any naked short position by purchasing Class A ordinary shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our Class A ordinary shares in the open market after pricing that could adversely affect investors who purchase in this offering.

So: yes, if you are pricing an IPO $2 below the offering range, you probably have some reason to suspect (1) that it sucks and therefore (2) that there'll be downward pressure on the stock the next day.******* Indeed, if you take the tape to the extreme conclusion, it's conceivable that Jefferies et al. sold as many shares last night for their own short account - 14mm or even more (why assume they're done buying?) - as they did for Manchester United and its selling shareholders. I doubt it's that much, but it seems pretty clear that the underwriters expected this deal to drag pretty hard, and gave themselves as much ammunition as possible to protect it.

So Monday should be fun. Perhaps not as fun as Thursday, though. That's when Facebook lockups start to expire.

Manchester United IPO Fails to Excite the Crowds [WSJ]
Manchester United F-1/A and pricing FWP [EDGAR]

* Btw, if you click that link, be sure to get furious at "In IPOs that trade higher, the underwriters will often choose to exercise their options to buy the overallotted shares at a discount to the IPO price, booking a profit on the difference, usually about 1%," amirite ECM people?

** ZeroHedge had the same chart as of earlier this afternoon, when trades at $14 were already way way over the greenshoe amount. They concluded "It seems increasingly self-evident that IPOs are simply weath transfer mechanisms - no win-win - and that the value-add from 'stock exchanges' is rapidly converging to zero," which, I mean, I can't really argue with that but I don't understand what it has to do with this chart. This chart should make you feel good, sort of, a little. If you bought in the IPO and regret it, you can repent at leisure and dump your stock back to the syndicate at no loss; if you missed out on the IPO but wanted in for some reason, you could eat your fill of $14 MANU all afternoon.

If you get all worried about unfairness of access to IPOs, and I don't know why you would (if you like fairness and the little guy, you should root for Fidelity, not retail investors), then this deal should be exactly what you want: MANU spent the day in suspended animation, offering unlimited liquidity to buyers and sellers at exactly the IPO price all day long.

*** Has someone else already pointed out that the Manchester United prospectus uses the most red ink of any prospectus ever? If not, dibs. PROPHETIC.

**** Update: But that's just a gut feeling and could be wrong, if for example this was the first appropriately priced IPO ever.

***** 1. It doesn't.
2. Why Berbatov? I dunno, I mentioned Wayne Rooney before, so wanted to mix it up, and I enjoy that he looks like Dracula.
3. I know he's not long for United. I could have said Robin Van Persie, I guess.

****** Yes the illegal kind, though there's an exception for this kind of thing. It's right in the prospectus and everything. And I assume "naked" in this usage refers to the fact that you're unhedged with a greenshoe option, rather than that you've failed to get a locate. But of course you can't borrow the shares you short in the IPO itself, so you are "naked shorting" those shares in the other sense too.

******* And if you're putting on a naked short and laying out more shares than investors expected, you have even more reason to suspect it, since you're probably stuffing someone with more shares than they wanted. There's some self-fulfillingness here: you've created the conditions for demand from you, yes, but also for supply from stuffees.