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Italy's Eu7.6bn Enel sale is biggest share deal since '01

The Italian government this week completed its sale of a 19% stake in Enel, the national electricity company, raising Eu7.6bn in the world's largest equity offering for three years.

The deal was a blowout success for global co-ordinators Mediobanca and Merrill Lynch and bookrunners Goldman Sachs and Morgan Stanley, which amassed over Eu19bn of demand before pricing on Monday.

The Italian treasury's choice of a fully marketed, public sale cheered investors and bankers who have become used to even large placements being made as accelerated block trades, underwritten by banks and sold within a day.

Those deals have the advantage of speed and surprise, but as with Italy's Eu2.2bn sale of a 6.6% stake in Enel last year via Morgan Stanley, the technique can backfire if underwriters miscall the market.

In a very aggressive trade that was the biggest block trade globally in 2003, Morgan Stanley tried to sell the shares at a premium to the market closing price, but is believed to have lost money on the trade, and ?left a bitter taste in the mouths of investors?, according to one equity banker at the time.

By using a publicly marketed sale this time, the Italian government shouldered the risk that Enel's share price would fall during the marketing phase.

But the technique allowed demand to build up so that the shares could be sold at the market price without any risk of a shock to the share price.

?Investors liked having time to make their decisions, and also getting the chance to ask the company's management all the questions they needed to,? said a senior equity banker working on the deal at a US bank in London. ?But I doubt this is a sign of things to come.?

Despite the enthusiastic reaction to the sale, bankers said they were not expecting any other European governments to use a marketed deal to privatise their holdings.

As if to confirm the point, the Belgian government used a bought deal on Wednesday to sell a 5.3% stake in national telephone company Belgacom.

Although Belgacom's IPO in March ? when a private consortium sold a 38.4% stake ? attracted strong retail demand, for the government's first sale it opted for an auction to the highest bidder.

Aggressive bids for block
In an aggressive competition, Goldman Sachs won the stake and sold the shares to the market at a price just 1% lower than the previous day's close, raising Eu537m.

The Eu3.7bn IPO of Spanish toll road and car park operator Cintra on Monday also showed that a large retail book was no guarantee of a strongly performing deal. Despite keen retail demand, the deal was priced at the bottom of the price range and the stock has slipped since issue.

The Enel deal is the biggest equity sale since Kraft Foods floated in the US in June 2001 for $8.68bn. Though the Enel sale is worth $9.68bn, Kraft's offering equated to Eu10bn when it was launched.

The demand for Enel's shares was highlighted on Monday morning when the leads exercised a greenshoe option and sold a further 150m shares to institutions, raising proceeds from Eu6.6bn to Eu7.6bn.

Though the deal was 50% bigger than the French government's Eu5.1bn sale of a 9.6% stake in France Télécom in September, institutions were still forced to scramble for more stock.

The institutional oversubscription intensified when the retail tranche was doubled from a minimum of 20% of the deal to 40.5%, after strong demand from the Italian public.

Over 500 international and domestic institutions bought into the Eu4.52bn of stock (including the greenshoe) allotted to them, which was widely seen as the must-have issue of the European market this year.

The shares were priced at Eu6.64 after a pricing meeting on Sunday, when both the institutional and retail tranches were three times oversubscribed.

Bankers said the large retail demand for the shares helped prop up Enel's share price during the two month marketing period for the deal.

Despite the sale of such a big lump of stock, half as big as the 38.3% in freefloat before the sale, the share price did not fall during the offering period ? in fact, it has gained 7.4% over the last three months, outperforming the Mibtel general index by 1.6%.

Shares rise after pricing
The stock traded well after the sale this week, closing up 2.55% on Monday and continuing to rise. It closed yesterday (Thursday) at Eu6.95.

The government retains a 31.4% stake in Enel, with the remaining 10.3% held by Cassa Depositi e Prestiti, a state bank.

Unusually, a specific allocation was made for Japanese institutions, after Daiwa and Nomura persuaded the Italian government to allocate 60m of the total 1.15bn shares for a Japanese public offer without listing, which was heavily oversubscribed.

But most notable was the large retail investor presence in the book. Some 630,000 investors lodged Eu4.3bn of orders for the Eu3.1bn retail tranche.

Bankers said that had made the tight pricing of the deal possible. Despite the jumbo size of the offering institutional accounts were still worried they might not get the allocation they wanted.

One of the main attractions of Enel stock for investors was the forthcoming special dividend of Eu0.33 a share, the first instalment of which will be made on November 25. The dividend results from Enel's Eu1.7bn spin-off and IPO of electricity grid operator Terna in June. These special dividend payments will give the company's shares a yield of more than 10% over the next 12-18 months.

Bankers said the offer benefitted from investors' shift towards defensive stocks this year. Enel has outperformed its sector peers, and has been unaffected by this year's rises in oil prices.

All this, though, may be to overcomplicate matters. As one banker working on the sale put it, ?it's a good stock, and it's going to return a lot of money to shareholders.?

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