Project Beetle ends in tears for hedge fund manager and City banker

David Hellier
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Project Beetle was the name used for a £350m fund-raising in 2009 that made 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 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 hedge fund manager, the involvement in Beetle has had masssive repurcussions.

On the web-site of the Financial Services Authority (FSA), there is one word alongside Andrew Osborne’s name: inactive.

His inactivity, since November of last year, has everything to do with a conversation he was involved in during the marketing of the Punch Taverns fund-raising which is now the subject of an FSA investigation.

Opinions vary as to whether Osborne or Oz as he is affectionately known in the City was just naive or unlucky in regard to a large investor in Punch Taverns, the aggressive US hedge fund manager David Einhorn, who has been fined £7.5m for using inside information.

City A.M. has been told that the FSA has spent months investigating events leading up to the public announcement on June 16 of the Punch Taverns open offer and share placing.

In particular investigators have focused on a conversation between Osborne, Einhorn 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 shareholders 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.

Osborne declined to discuss the case yesterday but a friend of his told City AM: "Andrew Osborne follows all legal procedures. it is quite clear that he did nothing deliberately wrong."

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

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 June 1 to 8.98 per cent on June 15, the day the details of the deal were announced to the stock market . He was unable to respond to telephone questions but today agreed a settlement with the regulators.

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. The two hedge funds argued that Punch, which had massive borrowings, would have been better off raising the money in smaller tranches and they also argued that the equity holders in the company were being asked to help out the bond-holders.

Although the deal resulted in Punch's share price falling 44p to 104p on June 15, it was broadly welcomed in the City because of its stabilising influence on the group’s long-term.
A note from Investec at the time said: "The issue puts Punch on a firmer financial footing and has avoided an enforced disposal of high quality assets to ensure greater flexibility."

An adviser to the issue said yesterday: "it was a life-saver otherwise the bond-holders would have taken over the business."

Osborne is expected to be given a fine by the FSA, although friends say he is confident that he will not be banned from working in the City even for a short period.

He has not spoken publicly since his exit from Merrill Lynch, which might result in the bank losing some of his clients such as Tullow Oil and Cairn Energy.

Friends of Osborne said last night that 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 that he was unlikely to take a new position until the whole FSA matter had been resolved.