Talk from the sharemarket is that UBS, the Swiss investment bank (and major friend of Australian business media), could be left with hundreds of millions of dollars of Downer shares after many big investors refused to take part in a $1 billion plus placement to fund Downer’s $1.3 billion hostile bid for serial underperformer, Spotless.

Downer had been looking for just over $1 billion from the big end of town and not even a 20% discount on the issue price at $5.92 could fill the issue. Market reports say only around 75% of the $1.01 billion had been subscribed, leaving UBS stuck with the rump after an auction of the shortfall on Thursday attracted no bidders. That right, none. On top of this, ordinary Downer shareholders are going to be asked to stump up a further $254 million. Having seen a big thumbs down from the major holders, small share owners will not be encouraged to take part. Some will, but advisers are telling them to wait and see what happens to Downer shares when trading resumes (the price will fall from Monday’s close of $7.42 down past the $5.92 issue price because of the surplus of unsold stock). The acceptance rate from small shareholders could be less than the already low rate for the big holders.

A 50% acceptance rate for the smaller issue would still see UBS stuck with well over $300 million of unwanted Downer shares. UBS has to meet the shortfall one way or another and get repaid, as it slowly disposes of the unwanted scrip. Botched deals like this are bad for bonuses and careers, but a hero’s welcome from the gnomes of Zurich awaits the whoever who can find a way of making this embarrassment vanish as quickly as possible.

Peter Fray

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