Context: An accelerated share repurchase (ASR) is one of the options for corporations that have decided to buy back shares of their stock. In an ASR, a company transfers cash to a bank and receives most of the shares it wants to buy upfront. ASRs typically include a minimum duration after which the bank can complete the program. In exchange for this timing flexibility, the bank guarantees a fixed discount to the average of the stock’s daily volume weighted average price (VWAP) for the period of the ASR. The bank is willing to provide the discount because it expects to achieve an even better discount through its buying and hedging activity.
While the majority of ASRs involve just one bank, larger transactions have led to more deals involving two banks. A banker with experience in buybacks said it’s typical that corporates solicit bids from about five banks, seeking the most favorable discount to VWAP. In situations where the corporate wants two banks that buy on alternate days, they typically need to find a discount that at least two banks can accept.
Kevin Castellano is co-founder, CFO and a client advisor at Matthews South, a capital markets firm that advises clients on transactions including ASRs. Asked about the question below from a NeuGroup member, he offered this additional context: - “ASRs with multiple banks are common for larger ASRs. The motivation is usually relationship-driven. Companies want to spread around the business from a wallet share perspective. And for larger trades above $1 billion, a company may achieve a higher discount because the risk is spread across multiple banks.”
- “A less significant consideration is counterparty risk, which is not huge. ASRs are usually short-dated and the company typically receives 80% of the value upfront.”
- “We can tell clients the fair price, and they go to the bank with the offer. The other end of the spectrum that we advise on is having a broader bid and just choose the two best prices. They will often ask the second bank to match the winner. However, sometimes they will trade at two different prices.”
Member question: “Has anyone executed an ASR transaction with multiple banks or concurrent ASRs with separate banks? If so, how have you approached negotiating the discount with multiple banks in the mix? Would you be willing to have a discussion on the approach?”
Peer answer 1: “We have bid out to a number of banks but only trade with one at one time (the highest discount) because we don’t want multiple banks buying our stock and potentially driving up the price. It could be like bidding against yourself.
- “I am curious what the benefits are with having multiple banks at one time? We do use a rotation so different banks are used at different times and everyone gets a piece.
- “We used to do ASR but moved to a different OMR structure with the banks. We basically have a 10b5-1 transaction and we pay as we go. No upfront cash needed at the start.”
Member response: “In a multibank scenario, we would have the banks alternate averaging days so only one bank is averaging on a given day. A significant driver of our consideration of using multiple banks is counterparty risk mitigation. We could have one bank take a full transaction, but that could result in a large concentration of counterparty risk on a large or long transaction.”
Peer answer 2: “We have done ASRs, but only one bank at a time.”
Peer answer 3: “We executed an ASR in November; we had a bidding process with four banks, and chose one to work with.”
Peer answer 4: “We have done multiple dual tranche/counterparty ASRs. I am happy to share our experience with these transactions.”
