On a wet and windy Thursday in October 1987, a crowd of bankers gathered at the headquarters of Rothschild & Co in the heart of the City of London. They were there to sign what was for many the biggest deal of their careers, having been chosen by the UK government to sell its stake in the oil giant British Petroleum. At £7.2bn, the deal was set to be the biggest share sale ever seen.
Within hours it would all go horribly wrong. That night, London was hit by the biggest storm in 300 years. For the first time since the Blitz, the city was plunged into darkness. Eighteen people lost their lives. But another storm was about to hit financial markets, one that would expose huge mistakes made by the banks and would leave them facing hundreds of millions of pounds in losses.
This episode of The Syndicate tells how the biggest share sale in history very nearly didn’t happen. It’s the story of how, within hours of the banks committing to underwrite the deal, stock markets around the world were hit by the biggest sell-off since the Great Depression. The crisis left one bank facing collapse because of its mammoth exposure.
While the 1987 crash was the main cause of the debacle, the fallout was made that much worse because of a series of rash decisions by the banks. At the time, the UK was in the middle of a massive sale of state-owned companies. Banks, eyeing the long line of privatisations in the pipeline, made a series of concessions to the UK government to win a place on the BP sale that would end up coming back to bite them.
Nigel Lawson, who was Chancellor of the Exchequer, came under huge pressure to cancel the sale. The US banks on the deal lobbied James Baker, the US Treasury Secretary, who called Lawson to ask him to call off the deal. When that didn’t work, the White House got involved, imploring 10 Downing Street to intervene and rein in a chancellor who was insisting on holding banks to their commitments.
But Lawson had also dug himself into a hole. Cancelling the deal would blow a £7.2bn hole in UK finances – much of which had already been spent in a generous pre-election budget. As banks lobbied to invoke “force majeure” clause, open warfare broke out between Lawson and Rothschild, which was supposed to be advising the government – but which he accused of switching sides.
Eventually Lawson had to find a way out. Just hours before the deal was supposed to officially launch, with several banks already resigned to deep losses, he stood up in parliament and announced a backdoor government bailout. Little did he know that in saving his own skin, the deal and the banks, he would create another political headache in the months that followed.
Despite the drama, the deal would leave a lasting impact on the capital markets of today. The BP share sale broke a lot of new ground from a legal standpoint and would eventually become a blueprint for cross-border equity deals. In many ways – and certainly from legal and structural perspectives – the deal was groundbreaking and many of today’s deals owe much to it.
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