The French government's sale of a Eu5.1bn stake in France Télécom on Wednesday shocked the equity market out of its August slumber, and bankers say it could lead to further large accelerated placements before the end of the year.
The sale is the second largest accelerated placement in market history. It reduces the government's stake in the company to below 50% for the first time.
In case equity-linked bankers felt excluded, France Télécom seized the moment to launch its own Eu1bn convertible bond, which was placed simultaneously with the shares. This deal is the second largest convertible bond issued this year after Deutsche Post's exchangeable into Deutsche Postbank, and will, if a 15% greenshoe is exercised, be the largest so far this year.
On Tuesday evening about 20 banks were invited to pitch for the share placement and the convertible. BNP Paribas, JP Morgan, Morgan Stanley and SG CIB were selected to underwrite the share placement. BNPP and SG were also selected to lead the convertible bond, alongside Goldman Sachs.
The banks began selling the shares on Wednesday morning before the market opened, offering 236m shares in a range of Eu18.95-Eu19.05. After a slow start the book gained momentum throughout the day, and was closed at 5pm, even though the leads had the option of a two day bookbuild.
The price was set at Eu19.05 and was 1.2 times covered. Equity bankers outside the syndicate said that Eu19.05 ?was very likely? to have been the price at which the banks had underwritten the deal. The price was a tight 0.2% discount to Wednesday's closing price and a 0.001% discount to Wednesday's volume weighted average price.
The demand for stock was demonstrated by the quick sale of a 31m share greenshoe, which increased the government's proceeds from Eu4.5bn to Eu5.1bn, and the total number of shares sold from 236m to 267m, equal to 9.6% of the company, and about 30 days' average trading in the stock.
UK and US accounts were the largest buyers of the stock. The UK took 30% and the US 27%. Domestic funds bought 10%, followed by German funds with 7%, with the rest going to a range of European institutions.
Bankers working on the deal said most of the investors were long-only funds, although equity-linked bankers said many of the hedge funds buying the convertible were also buyers of the shares.
Yesterday (Thursday) FT's share price rose 1.6%, which bankers attributed to the removal of the overhang on the company's stock. The large French government deficit meant that investors had been expecting the sale this year, and the government confirmed in a statement that it would use the proceeds to reduce the deficit.
There was speculation in the market that some investors and banks had anticipated the launch of the deal, despite its unusual timing. FT's closing share price on Tuesday was 4.2% down on last Friday's close, compared with a fall in the CAC 40 index of 1.5%. This led one French equity banker to suggest that some of the market was preparing for a sale of FT stock in the days before the deal was launched.
The timing took most of the market by surprise, though, and most bankers detect the influence of French finance minister Nicolas Sarkozy, who is known to want to speed up privatisation.
Sarkozy is expected to resign from his cabinet position this year if he becomes leader of the French political party Union pour un Mouvement Populaire. The reduction of the government's stake in FT below 50% is a milestone for the French privatisation programme, and a political coup for Sarkozy.
Simultaneous convert
Like the straight equity sale, FT's sale of an Eu1bn convertible bond also found strong investor appetite. BNP Paribas, Goldman Sachs and SG CIB offered the four year bonds to investors with a conversion premium of 32%-37% and a coupon of 1.35%-1.85%.
Convertible bond analysts at Barclays Capital said in a research report published on Wednesday that, assuming a 48bp credit spread, 30bp stock borrow, 2% dividend yield and 24% volatility, the convertible would be valued at 97.7-100.6.
The leads began selling the bonds at the same time as the straight equity placement, and closed the book in the early afternoon of the same day.
They then had to wait for the share placement to be priced before they could set final terms, since the equity deal's offer price was used as the reference price for the conversion premium.
The bonds were priced slightly above the middle of the range, with a 1.6% coupon and a 35.49% conversion premium. Convertible bond analysts said this was aggressive pricing, giving an implied volatility of about 26%, compared to 100 a day volatility of 22.7%, and OTC volatility of 24.5%.
Yesterday the bond was trading at about 100.20-100.30 in the grey market.
?The rarity of convertibles from telecoms companies helped improve the attractiveness of the deal,? said an equity-linked banker working on the deal in Paris. ?This allowed FT to get cheap financing, and allowed us to push the pricing.?
The bond generated gross demand of more than Eu4.9bn, and total demand at the final terms was Eu3.1bn. Hedge funds bought 51% of the bonds and outright accounts took 49%. ?We got a lot of support from outright investors, who liked the equity story and the overhang removal,? said an equity-linked banker working on the deal.
?There is a lot of cash available to invest in the convertible market at the moment, but convertible returns have been hard hit over the last couple of months and investors are not going to do you any favours.?
Equity bankers were initially worried that FT's decision to place a Eu1bn convertible bond at the same time as the government's sale of its stake could upset the straight equity sale.
One equity-linked banker said he had calculated the likely impact of convertible arbitrageurs before the deal. The figures showed that if half the bonds were bought by hedge funds, as happened, this was only likely to result in short sales of about Eu200m, a tiny amount considering the overall deal size.
Freedom to buy
Though the reduction of the French government's stake to below 50% is psychologically important for FT and a political achievement for the government. The sale became inevitable earlier this year when the government changed the law to allow it to reduce its stake in the company below 50%.
In fact, a European telecoms analyst told EuroWeek that on a fully diluted basis the government may have already broken the 50% mark earlier this year.
According to the equity analyst, the French government had hoped that FT would have started making acquisitions soon after it changed the company's status. This, the government expected, would lead to its stake being reduced to below 50% before a sale, avoiding the political risk of selling down the holding below 50%.
Convertible bond investors looking for an M&A volatility play are also likely to be disappointed. ?We don't see FT making any big acquisitions soon,? said the telecoms analyst.
?And if they do, they are generating more than enough cash to be able fund acquisitions without using their equity, which is actually undervalued at the moment, making a share funded acquisition unattractive.?
Analysts at Dresdner Kleinwort Wasserstein wrote in a research report on Wednesday that they expected FT to generate free cashflows equal to 16% of its market capitalisation this year, with estimated sales of Eu47.4bn. This cash, the analysts suggested, could be used to buy back any shares the government sells in the future, and would not be used for acquisitions.
More telcos to come
Inevitably speculation will now turn to when KfW, the German state development agency, will launch its next sale of Deutsche Telekom shares, which the market expects before the end of this year.
However, while the FT sale shows investor demand exists for European telecoms stocks, it may have stolen DT's thunder. ?The Germans must be furious,? said an equity banker not working on the FT deal.
?It's always best to be the first to open the market, and not just part of a queue.?
While the German government faces budget deficits on the same scale as the French, and needs the money from asset sales to help reduce its debts, it may have to consider selling other stakes before DT, such as Deutsche Post.
The Austrian government is also expected to reduce its holding in Telekom Austria, after its aborted merger with Swisscom last month. The telecoms analyst said the odds of a sale this year were 50/50.
