How Project Beetle sent a City rain maker and a US fund manager scuttling

David Hellier
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PROJECT Beetle was the name used for a £350m fund-raising in 2009 that led to a critical reduction in Punch Taverns’ £4bn debt pile.

Those who worked on the ultimately successful transaction, which included bankers from Bank of America Merrill Lynch (BAML) and Goldman Sachs, and lawyers from Slaughter & May, had every reason to celebrate the deal and move on to the next.

But for one investment banker and one US hedge fund manager, their involvement in Beetle has had massive repercussions.

On the website of the Financial Services Authority (FSA) there is one word alongside former BAML banker Andrew Osborne’s name: inactive.

His inactivity, since December of last year, has everything to do with a conversation he was involved in during the marketing of the Punch Taverns fundraising, which yesterday led to a £7.2m fine for David Einhorn and his firm Greenlight Capital.

Opinions vary as to whether Osborne, or Oz as he is affectionately known in the City, was just naive or unlucky in regard to Einhorn, a large investor in Punch Taverns.

The FSA has spent months investigating events leading up to the 16 June public announcement of the Punch Taverns open offer and share placing.

In particular investigators focused on a conversation that included Osborne, Einhorn, Jim White, then of Goldman Sachs, and the then Punch chief executive Giles Thorley, in the early part of June that year.

As is usual, Osborne, as the company’s corporate broker, wanted Einhorn, a large shareholder in Punch, to be pre-warned about the imminent transaction so that he might support it.

Unusually, when Osborne asked Einhorn whether he would “wall cross” (or become an insider to the issue, which would involve not buying or selling any shares in Punch for an agreed number of days), the American refused.

Bankers said that this would have been an unusual situation and a difficult one for Osborne to deal with. “99 times out of 100 a shareholder agrees to being made an insider, as long as you give them an idea how long they will be unable to trade for,” said a source yesterday.

Friends say that Osborne then brought the conversation to a close but regulators appear to have judged that some information about the rights issue was indeed passed on to the hedge fund trader, albeit not deliberately.

Einhorn is a confrontational character who famously shorted shares in Lehman Brothers ahead of its collapse and who publicly took on the bank’s then finance director Erin Callan, rightly suggesting that she was being too optimistic about the bank.

At one point Einhorn was Punch Taverns’ largest shareholder. However ahead of the public announcement of the fund-raising there were four separate announcements, all in June, showing that he had reduced his stake in the company.

The stake went from 13.3 per cent on 1 June to 8.98 per cent on 15 June, the day the details of the deal were announced to the stock market. The FSA said his dealings saved the funds losses of £5.8m.

Greenlight and QVT became vigorous opponents of the fund-raising deal and their opposition nearly led to it being voted down.

Needing a shareholder vote of 75 per cent, Punch recorded a narrow victory of 75.1 per cent. Although the deal resulted in Punch’s share price falling 44p to 104p on 15 June, it was broadly welcomed in the City because of its stabilising influence on the group’s long-term prospects.

Osborne is expected to be given a fine by the FSA, but he is said to be confident he will not be banned from working in the City. Friends of the Welsh rugby-lover said last night he had been approached by a number of banks who are interested in hiring him and that he has been offered at least one non-executive chairmanship.

But they said he was unlikely to take a new position until the whole FSA matter had been resolved and as of yesterday his dealings with the FSA were still ongoing.