Morning. How are you? Good chat.
Yesterday the market fell heavily, down nearly 1%. It was the worst day in almost 2 months and there’s probably still more to come. The thing is, Tuesday’s sell down had nothing to do with profit taking by large institutions (which I mentioned on Monday) or from any bad news being released to the market. It was all due to the actions of Royal Dutch Shell. #Fistshake
Shell vs Woodside
Royal Dutch Shell is one of the largest oil companies in the world. You may remember them from such things as that petrol station down the road or that place you bought red bulls & durries from at uni? Anyway, many years ago they tried to take over Australia’s largest oil company Woodside Petroleum, but the deal was slapped down by the Australian Government on account of the assets Woodside owned being strategically important to the country. Fair call.
Shell had already massed a pretty hefty stake in Woodside though, which at its peak sat at 40%. What to do? Well for many years they just held on to it, riding on the coattails of some high oil prices. Over the last 5 or so years though, as oil prices have fallen, they have been progressively selling down more and more the business. And yesterday they got rid of another 3.5 billion dollars’ worth.
How did it work?
You can’t just decide to sell 3.5 billion dollars’ worth of a company. It not that simple. You’ve got to be secretive and strategic. Otherwise you risk having a really big impact on price. Remember, when there is more selling than buying, prices fall. 3.5 billion dollars is a lot of selling to get done, in fact it is 8.5% of all shares Woodside has on issue. So there is a big risk if Shell isn’t smart about the sale, they could push the price of the stock down significantly whilst they are selling. Worse, if other investors get wind of what they are planning to do, they could start selling shares in Woodside now, on the expectation they’ll be able to buy them back cheaper once Shell dumps their holdings.
To get it done with minimal leakage to the market and minimal impact on price, it had to be completed in one day. This deal is investment banking big league stuff.
Now, I don’t know specifically how this trade occurred, cause I wasn’t there, but I can give you a flavour for how it would have played out:
- Monday 13 November: Shell has a meeting with their investment banking relationship guy (think Harvey Spector) and says they want to sell down their stake in Woodside
- Harvey walks out with purpose and calls his assistant, telling him to assemble every one of the banks sales trading people (these are the folks who pitch stock ideas to investment managers) in a room and wait for him.
- He arrives back at the office and gets straight to business. “Listen up. I want you to call every one of your clients as soon as the market closes and to get commitments from them to buy Woodside shares. I don’t want to hear excuses. They don’t answer, you keep calling back until they do. They will take your call and they will buy this stock, or you’re out of a job. This deal goes down as soon as the market opens tomorrow. You have 12 hours, now get to work.“
- “Why are you still standing here!? Let’s go!”
- The sales people run back to their desks and immediately start calling their clients. Obviously they can’t disclose to them how much they have to sell, just that they are selling, so it makes the conversation a bit tricky. But this isn’t their first rodeo and ultimately they get the job done.
- Midnight Monday, Harvey still in his office, gets the call from his second in command that it’s done. They have whiskey, discuss their greatness and go home.
That’s great – And the market fell because?
For these investment managers to buy all of this Woodside stock, they have to pay for it with cash. They don’t just have this lying around though. Instead, they have to sell some shares they already own to raise the required cash. So yesterday, from the moment the market opened, 3.5 billion dollars’ worth of shares had to be sold in order to afford the new purchases of Woodside. This cash was then given to Shell.
In other words, the market fell, because there was 3.5 billion dollars more selling than normal. And when there’s more sellers than buyers, the market falls.
Anyway, that’s 5 minutes. Hope it helped