Speak Softly and Carry a Big PIPE

Amid today's capital-markets cacophony, the ability to raise money quietly is especially attractive. And for many, private investment in public equity transactions (PIPEs) seem to be a silent, safe haven for issuers unsure whether an offering will attract investors. "The last thing a company wants to do is go to the market publicly and fail," notes Stuart Bressman, an attorney at Proskauer Rose, who works on PIPEs.

It was not always thus. During the Internet bust the private placements were often a capital-raising approach of last resort for smaller public companies closed out of the wider markets. But now, Bressman says, PIPEs have matured to become relatively mainstream, What's more, a subset of the PIPE, known as a "registered direct" transaction, has also come into its own, and is being used by big and small companies.

Registered direct deals are PIPEs that involve shares already registered with the Securities and Exchange Commission. Completing the regulatory paperwork early through a shelf registration gives companies two to three years to issue the shares, thereby allowing them to move quickly when the market conditions are right, says Bressman. The company's board of directors must approve the issue, in the same way they would approve any secondary offering. But a registered direct offering is presented only to a tiny group of hand-picked investors and brokered bilaterally by an investment bank acting as a placement agent, rather than an underwriter.

Orient-Express CFO Martin O'Grady saw a need for speed when opportunity knocked, so he worked with bankers to place nearly 8.5 million shares with select investors.

Nearly eight years after the air oozed out of the Internet bubble, investors and large, well-known issuers have become more comfortable with the idea of buying and selling stock behind closed doors. As a result, some big names are taking their cue from smaller companies and completing registered direct deals.

For example, in October, tax service retailer H&R Block Inc. sold 8.3 million shares of common stock at a price of $17.50 per share through a registered direct offering. The company plans to use the proceeds to "enhance capital and maintain financial flexibility," according to its regulatory filing.

Then in November, luxury travel and leisure company Orient-Express Hotels Ltd. announced a registered direct offering of almost 8.5 million common shares priced at $6.50 per share. The travel company expects to use the net proceeds for general corporate purposes, which could include reducing debt, capital investment in existing properties, and funding working capital needs.

So far this year, there have been 78 registered direct deals totaling $2.9 billion in gross proceeds, which represents about 8 percent of the 969 PIPE transactions completed in 2008 for an aggregate $108 billion, reports Sagient Research, which runs the PlacementTracker database. However, despite the interest from large companies, this year's deal tally trails the totals for the previous two years, which reached 107 ($3.7 billion) and 104 ($3 billion) for 2007 and 2006, respectively.

"Our preference would have been to make a rights issue," says Orient-Express CFO Martin O'Grady, which is more common in the UK market. But the finance chief tells CFO.com that such a deal would have taken longer. "We saw a window of opportunity to raise cash in an accelerated timeframe in a discrete manner. In essence we did a 'targeted rights issue' and reached out to our key investors, including our more active, more vocal hedge fund investors," notes O'Grady. Based on PlacementTracker data, the Orient-Express offering, which raised more than $55 million, was the tenth largest deal in terms of gross proceeds completed this year (see chart.)

O'Grady's need for speed pointed him in the direction of a registered direct deal, as the transactions are closed lightening fast. Investors commit to the deal upon pricing, and within three days the transaction is closed and the stocks are tradable the next day, explains Richard Gormley, a managing director with investment bank Lazard, the placement agent on the H&R Block and Orient-Express deals. Because the shares are registered when they are sold, and therefore "fully liquid," the stock tends to command a better price for the issuer than a PIPE deal done with unregistered shares.

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