Goldman Sachs Completes British Petroleum Privatization Under Challenging Circumstances

Goldman Sachs is retained as US advisor in the privatization of the UK government’s remaining interest in British Petroleum Company PLC, the largest sale ever by HM Treasury. When it coincides with the 1987 “Black Monday” stock market crash, Goldman Sachs absorbs the largest loss the firm has ever taken.

During the 1980s, Goldman Sachs played a key role in the United Kingdom during a time of widespread privatization under the leadership of Prime Minister Margaret Thatcher. As early as 1977, Goldman Sachs was an underwriter of the US tranche of British Petroleum Company PLC (BP)’s privatization. In 1987, the firm advised BP in its acquisition of Standard Oil Co. in Cleveland, which would become the basis for BP America. That same year, Goldman Sachs acted as lead underwriter in the United States for the sale of the UK government’s remaining 31.5% stake in BP – the largest sale ever by the British Treasury. In combination with new shares BP sought to issue, the offering would total more than £7.25 billion (around US$12.4 billion dollars at the prevailing exchange rate, or US$32.9 billion in 2023 dollars).

Per British underwriting standards, the share price was agreed upon two weeks before the stock would begin trading. The first day of trading was to be Friday, October 30, 1987. Over that two-week waiting period, the deal’s underwriters assumed market risk. On October 19, the “Black Monday” market crash occurred in the United States, triggering a chain reaction of equity market declines around the world. As a result, Goldman Sachs and other underwriters of the BP deal faced massive prospective losses.

Several firms, Goldman Sachs included, sought to persuade the British government to trigger a force majeure clause that would allow the offering to be suspended until market conditions normalized. After the banks’ case was rejected by Chancellor of the Exchequer Nigel Lawson, rather than attempting to extricate itself from the deal, Goldman Sachs made the decision to move forward — and absorb the largest underwriting loss in the firm‘s history.

Goldman Sachs’ resolve to not only assume this loss but also to continue to seek participation in future UK privatization deals – which would be subject to the same underwriting standards that put the firm’s capital at risk – led to its growing status as a leading advisor and banker to British government and industry in the years to come.

 

This article was originally published as part of a series commemorating the 150th anniversary of Goldman Sachs’ founding in 1869.