Shares in Dr. Martens PLC (LON: DOCS) fell as much as 13% yesterday with another 1.5% or so at pixel time this morning. The cause was simple enough, Permira liquidated some of its stake in the recently floated company. This is, of course, standard enough practice. Permira took Dr. Martens over back in 2013 for £300 million, sorted it out and brought it to market in a flotation last year. At some point, Permira would like to cash in some of its profit. Of course, they would.
So, that’s what happened yesterday. Permira sold some 6% of Dr. Martens shares and raised £257 million by doing so. Naturally enough such a large sale was done at below market price (395 p rather than the 430p -ish prevailing before the sale announcement) and so the Dr Martens share price has fallen. Why pay more if there’s a placing of that much stock available at a lower price?
As ever what interests us as traders is what comes next. At which point there are some short-term and tactical, even technical, issues to consider and then the longer term and more strategic.
In the short term, there’s a wash of Dr. Martens stock on the market. Yes, every such placing always does say that the only buyers are long-term institutional investors and that’s simply what is said. At least some of them will likely to be looking to see if a quick turn, a stagging profit, is available. Given that the current price is below the placing one that’s not going to fly. So, as often does happen as a result of such placings there’s a certain amount of the stock out there that is footloose and fancy free. Only when that is securely placed with long-term buy and hold investors are we likely to see a strengthening of the Dr. Martens share price.
On the other hand, still in this short term, it was always obvious that Permira would offload some of their stake. There always was that overhang. But the rest of their holding in Dr. Martens is now locked up for 90 days – that’s a normal part of such placings, that the seller must indicate what it’s doing with any residual stake. In the short term therefore the Dr. Martens price is likely to move on the balance of these two effects.
Permira, barring exceptional circumstances, won’t be selling more for three months. What they have sold though needs to find secure homes where they’re not being traded on short-term price movements.
In the longer term, there’s what will Permira do after the 90 day lock up? They’ve shown a willingness to cash in at current levels. So, if the Dr. Martens price rises again will they sell more after the lock-up? That is, we might have eliminated some short-term overhang of stock to be sold but at the price of wondering whether there’s much more possibly to come?
The trading position is to work through these possibilities and come out the right side of them.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.