TPG has waived price reset payment provisions agreed to during its $2 billion (€1.3 billion) investment in US savings and loan giant Washington Mutual (WaMu) last April, according to regulatory filings.
In waiving the anti-dilution measure, TPG gives up the right to be made whole on its holdings of WaMu's common shares should the bank raise more than $500 million of additional capital or sell itself for a price below TPG's $8.75 entry price.
It also gives the struggling bank flexibility in pursuing additional capital raisings or a sale at a time when it is struggling to shore up its finances since now it can do so without having to make a potentially large monetary payment to TPG.
A private equity investor like TPG does not waive a right like this in an ordinary course of business, but right now we're not in an ordinary course of business.
For example, should the bank agree to sell itself to Citi or Wells Fargo – which have reportedly expressed interest in entering merger talks with WaMu – at a price of $2 per share, WaMu would have had to pay TPG the difference between the $2 purchase price and TPG's entry price of $8.75 for each of the 228 million common shares that it converted from series T preferred shares back in June – a sum totaling more than $1.5 billion. This hypothetical calculation is based on TPG's 3 July 13D filing and excludes warrants and convertibles, which would make that number larger.
Since that time, though, the Financial Times has reported that TPG has sold down its original $2 billion investment to $1.3 billion, spread across three different funds. As a result, the financial impact of this waiver for the firm may not be as great.
Yesterday, WaMu closed at $2.01 per share, representing a 95 percent drop in its share price since TPG made its initial investment last April as part of a larger consortium that invested a total of $7 billion.
“It became clear that it would be in the best interests of WaMu and our investors to waive the price reset payment provisions that were agreed to with the bank at the time of our original investment in April 2008. Our goal is to maximise the bank's flexibility in this difficult environment,” TPG said in a statement.
Susan Chaplinsky, professor of business administration at the Darden School of Business of the University of Virginia, said: “Frankly, a private equity investor like TPG does not waive a right like this in an ordinary course of business, but right now we're not in an ordinary course of business.”
Chaplinsky, whose academic specialty is studying private investments in public companies such as the TPG investment, thinks that TPG is making a calculated bet that its shares will be worth more in the long run if they waive the price reset provision and let the bank raise more capital than they will be otherwise.
“The most likely scenario is that they're headed for bankruptcy and TPG has to asses what they would get from that scenario versus waiving this right and increasing the likelihood that WaMu will survive,” Chaplinsky said.
TPG isn't the only firm to include price reset provisions in its private placement contracts. Such terms have become a popular way for investors to protect themselves from the downside in PIPE transactions.
Price reset provisions can be structured as a cash payment – like in TPG's case – that adjusts to equity issuances or merger agreements below the investor's entry price or a floating conversion rate that gives the investor more common equity in such a scenario. Both are anti-dilutive measures meant to discourage the company from entering into such agreements.
However, such provisions are quite rare for common stock transactions.
Year to date, according to data from PrivateRaise, a service of DealFlow Media, the US market has seen 200 debt convertible PIPEs, 125 preferred convertible PIPEs and 621 common stock PIPEs. Of the debt convertible PIPEs, 61.5 percent had cash payments or adjustments to the conversion price or some other sort of anti-dilutive provision and 67 percent had warrants. Of the preferred convertible PIPEs, 64 percent had anti-dilutive provisions and 56.8 percent had warrants. By contrast, only 5 percent of common stock PIPEs had anti-dilutive terms in the contract, though 51 percent retained warrant rights. TPG's investment falls into that category.
However, while inserting such contingent anti-dilutive measures may protect the investors, it may also negatively impact the outcome for shareholders. Chaplinsky, who studies the frequency and success of such deals, notes that “categories [of transactions] that have contingent claims do significantly worse than those who don't and they tend to be more distressed investors at the initiation of the PIPE.”
She also points out that multi-billion dollar PIPEs like this are unusual since the core market for such transactions is in the $25 million to $50 million range and usually includes small to mid-cap companies that are not very actively traded, are struggling financially and need to raise capital quickly.
Though WaMu is struggling and looking for liquidity, even at a depressed stock price of $2 per share the bank has a market cap of $3.43 billion and is very actively traded.