While volumes of French equity and equity-linked financings may have been unspectacular so far this year, observers are hopeful about the longer term prospects for the privatisation programme.
Remember Europe?s junior stock exchanges? As the technology revolution of the late 1990s gathered a head of steam, exchanges like Germany?s Neuer Markt were heralded as the motors that would help push forward popular share-ownership throughout Europe.
In the event, there was much less sound and fury associated with the launch of France?s junior market than there was in neighbouring Germany, which perhaps explains why, when the bubble burst so spectacularly, the Nouveau Marché escaped the ignominious fate that befell the Neuer Markt.
France?s Nouveau Marché has avoided going the way of Germany?s Neuer Markt, although in terms of new issuance it has been lying virtually comatose for the last three years.
The market was not helped in the middle of June by the cancelling of a Eu280m IPO for biotechnology company Immuno-Designed Molecules (IDM). The IPO of IDM would have been the first IPO on the Nouveau Marché since 2001.
Lead manager UBS said that competition from a number of larger IPOs in the same sector meant the issue would have struggled to attract the attention of the specialist investors required. Poor market conditions were also cited as a reason for the deal being cancelled.
The fact that IDM?s selling shareholder Wendel Investissement, which has a 35% stake in the company, decided to cancel the sale of its stake shows how rocky conditions are in the French new issue market after its re-opening by the internet and telecoms company, Iliad.
In January its Eu104m IPO arranged by SG was oversubscribed by 25 times, allowing it to be priced at the top end of the Eu14-Eu16.30 range, and prompting a sharp rise in the share price on the first day of trading.
Fast forward a few months, to France?s next notable IPO of the year, and the experience was very different. When Schlumberger offloaded its 87% holding in the smart card manufacturer, Axalto, via Deutsche Bank and SG CIB in May, it was a hard slog, with the shares priced at the bottom of their Eu14.80-Eu15.70 range.
?Axalto was floated at a time when a number of other issues were being postponed, downsized or downpriced,? says Jean-François Tiné, global head of equity syndication at SG CIB, adding that the timing of the Axalto issue was unfortunate as it coincided with a day when all markets were off by between 1% and 2%. ?The deal was fully covered and initially traded down, but it has now recovered and is trading above its issue price,? Tiné says.
A confused state
Tiné acknowledges that for the time being the going is likely to remain tough at the primary level of the French equity market. ?It?s fair to say that investors are confused about the trend in the equity market, and while they may not be bearish they see little reason to be bullish either,? he says. ?As a consequence, investors have the upper hand at the moment. They are highly price-sensitive and story-cautious at the moment, which makes life tough.?
Nor has much in the way of compensation been provided by the barren equity-linked market, which has seen the princely total of one transaction this year. That was a tiny Eu22.5m convertible led in April by SG for the luxury goods manufacturer and retail, ST Dupont. But as Jean-François Mazaud, SG CIB?s head of equity-linked origination, concedes, ?the reality of the French convertibles market since the start of the year has been almost flat.?
There are no structural reasons explaining the inactivity in the market. ?Nothing has changed with respect to the law, and nothing has changed with respect to the tax treatment of convertibles,? says Mazaud. ?And the investor base is cash rich and eager to invest in primary equity-linked transactions.?
As with the corporate bond market, the problem is not demand, but supply, which contrasts vividly with the last two years. Mazaud says that French companies were the most prolific issuers in the European convertibles market in 2002 and the second most active in 2003, so perhaps they were due a break in 2004.
?Like the corporate sector elsewhere in Europe, French companies are now strongly cash positive and are buying back shares or paying higher dividends to their shareholders,? Mazaud says. Nevertheless, he is hopeful about the outlook for equity-linked issuance in France.
?I have good reason to believe that we will see new convertible issues in France and in the UK in the second half of the year,? he says. ?What could trigger a rise in issuance? Aside from the need to raise funds to finance acquisitions, the prospects of a rise in interest rates might persuade corporates that it would be prudent to crystalise long term rates now rather than wait. But in order to do that companies need to have more confidence in the outlook for their share prices and everybody recognises that we are in an environment of great uncertainty as to where valuations will be over the next few weeks.?
Like many European stock markets, France?s has turned in an anaemic performance for the year as a whole, with the CAC-40 index up a little over 4% in local currency terms between the end of December and early June.
Privatisation: a necessary evil
If the future of the convertibles sector is likely to remain hostage to the performance of France?s equity market, then so too will that of the country?s privatisation programme, which, on paper, is the most far-reaching within the Eurozone.
Given a budget deficit still weighing in at a stubbornly high 4.1% of GDP, privatisation is viewed more by the government as a necessary evil than as an ideologically desirable way of increasing industrial efficiency while raising much needed revenue. More precisely, it has been identified by the new finance minister, Nicolas Sarkozy, as a means of raising at least Eu3bn over the next year or so.
|French ECM Bookrunner rankings|
(January 1-June 22, 2004)
|Rank||Bank||Total ($ m)||Issues||Share %|
|1||ABN Amro Rothschild||975.75||3||14.98|
|5||Credit Suisse First Boston||885.63||2||13.59|
|Total of issues used in the table||6,514.64||17||100|
?I?m not sure that I would describe the new finance minister as particularly market or investor friendly,? says one banker. ?But the one certainty is that he needs to find some money quickly and is likely to be pragmatic about how he raises it. What is official is that he is looking at the state?s assets as an option for generating revenue.?
In theory, that means that the government?s remaining ownership in companies such as France Télécom, Electricité de France (EdF), Gaz de France (GdF), Renault and others may all be put on the block over the next few years, no matter how much opposition there is to privatisation at a grass roots level. Last year, for example, union leaders successfully stirred up a hornet?s nest when they told France Télécom?s 106,000 employees that any reduction of the government?s majority holding in the company would result in the loss of their pension rights.
Nevertheless, France pushed forward with the reactivation of its privatisation programme in June, with the sale of a 35% stake in the aero-engine manufacturer Snecma. That did not augur well for the renaissance of French privatisation.
At the start of May, finance minister Sarkozy had indicated that the sale of the stake would value Snecma at between Eu4.6bn and Eu5.7bn, a valuation range that was reduced to between Eu4.1bn and Eu4.6bn when the sale eventually kicked off in early June via CSFB and Calyon as joint bookrunners and ABN Amro as joint global co-ordinator.
Although the transaction was reportedly two times oversubscribed, its pricing was set well towards the bottom of its indicated range of between Eu15.45 and Eu17.20, with institutions paying Eu15.70 a share and retail investors Eu15.60, valuing the company at Eu4.2bn, in France?s largest privatisation since March 2002.
While the Snecma deal may have laboured, bankers are hopeful about the longer term prospects for the privatisation programme, for a number of reasons. First, as one ECM head says, the French government now appears to be laying the groundwork for privatisation more seriously than it has for many years, clearly outlining its plans to the general public in a bid to win hearts and minds.
Second, even if Snecma failed to leave a very appetising taste in the mouths of international institutions, there is a general agreement among bankers that the companies that are on the government?s checklist for privatisation are precisely the sort that France needs if it is to revive longer term interest in the equity market.
?The companies that the government has earmarked for privatisation are either value stocks or have very well known brand names, which makes them very appropriate candidates for IPOs,? says Bertrand Lussigny, head of the Paris equity syndicate at BNP Paribas.
Others clearly agree, and a number of banks are beefing up their presence in French equity capital markets in anticipation of an increased flow of business across the board. DrKW, for example, has recently hired Vincent Hubert from ABN Amro Rothschild to head up its French ECM franchise. That suggests a strong belief in the future of France?s privatisation programme, given that Hubert advised the government on the sales of companies such as AGF in 1995 and Air France in 1999.
But Hubert himself says that DrKW sees substantial opportunities for the ECM business beyond those that may emerge as a result of the privatisation programme. ?Activity in the French equity market is not limited to privatisation,? he says. ?Over the course of the last 15 years privatisation has accounted for between 10% and 30% of the ECM business depending on the year. So of course we hope that privatisation will be an important part of our business, but we also intend to participate in the revival of the entire French ECM business.?