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  • Writer's pictureTed Ohashi

Revisiting our understanding of a "bought deal"

We are forced to revisit our understanding of the term “bought deal.” Investopedia says, “A bought deal is a securities offering in which an investment bank commits to buy the entire offering from the client company. A bought deal eliminates the issuing company’s financing risk, ensuring that it will raise the intended amount... A bought deal is relatively risky for the investment bank. This is because the investment bank must turn around and try to sell the acquired block of securities to other investors for a profit. The investment bank assumes the risk of a potential net loss in this scenario, either that the securities will sell at a lower price after losing value, or that they will not sell at all.”

To me, the meaning of a “bought deal” goes back to October 19, 1987 when the Dow Jones Industrials fell 22.6% in one day also known as “Black Monday” or “Black Tuesday” depending on which time zone you were in. I refer to this event because British Prime Minister Margaret Thatcher’s government was selling British Petroleum (BP) on a “bought deal” arrangement. The sale, that was a record size in terms of value, was priced with a huge syndicate of investment banker/underwriters at 330 pence per share on Wednesday October 14, 1987 when the stock was trading at 350p per share. But on Black Monday, before the issue was sold, the stock market price of BP fell to 262p. U.S. underwriters Goldman Sachs, Salomon Brothers, Morgan Stanley and Shearson Lehman reported they had no buyers for any shares of BP at any price and Canada’s allocation was held by Wood Gundy that Wikipedia reports went out of business as a result.

Unfortunately for the investment bankers, Thatcher played hardball and wouldn’t give an inch or perhaps I should say, a pence. The underwriters decided they had to honour their agreement and lost over $1 billion. That was when a billion dollars was a whole lot of money and a bought deal was a bought deal.

A few weeks ago I gave Namaste a hard time for agreeing to change the terms of their bought deal. Perhaps I spoke too soon. Last week, Medmen (CSE: MMEN) also agreed to reprice their bought deal terms. I guess it’s a good thing these underwriters weren’t dealing with the Iron Lady.

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