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Goldman’s $1.2bn Telenor bought deal turns sour as investors dump the stock

The curse of the bought deal struck again on Tuesday when Goldman Sachs had to cut the price on a $1.2bn tranche of stock in Telenor, the Norwegian telephone company ? and was still left holding some of the shares.

Mediobanca also had to fight to place a Eu655m block of shares in Snam Rete Gas, the Italian gas distribution network, on the same day, though the bank insisted the shares had all been sold within its price range.

Investors have become nervous of fast trades in which investment banks are on risk, after a string of deals in which banks have bid too aggressively to win business and overreached themselves.

Last October Morgan Stanley was left with shares on its books after a Eu2.2bn block trade in Enel, the Italian electricity company, while a hasty decision in January cost Citigroup an estimated Eu100m on a Eu1.8bn block of Infineon, the German semiconductor manufacturer.

On Tuesday this week Goldman Sachs bought a 9.4% stake in Telenor from the Norwegian government, and Mediobanca bought a 9.1% stake in Snam Rete Gas from Eni, the Italian multi-utility.

Both banks were initially thought to have been left with stock on their books, though yesterday (Thursday) Mediobanca released a statement saying it had sold all the Snam stock and insisting reports that it had a 2% holding left to sell were incorrect.

Goldman Sachs ran into difficult market conditions on Tuesday, which forced it to reduce the price it was asking for the 170m Telenor shares.

Goldman had won the block trade after a competitive bidding process organised by Citigroup.

It initially offered the shares to the market at Nkr48.90, a 2% discount to the previous day's close of Nkr49.90.

But poor market conditions forced Goldman to reduce the price to Nkr48.50, knocking the value of the stake down from Nkr8.3bn to Nkr8.2bn ($1.2bn).

"It was a tough market, which made this transaction pretty difficult," said an equity banker in London working on the deal. "We took a strategic decision to tell the market that we had lowered the price of the shares, and we also decided it was prudent to take a relatively small holding in the shares."

Goldman Sachs would not reveal the size of the holding it now has in Telenor, nor for how long it intends to hold the shares.

The equity banker said the bank was relieved to have completed the transaction.

Telenor's shares fell heavily on news of the sale and hit a low on Tuesday of Nkr47.00 ? 5.8% below the previous close and 2.8% below the reduced price at which Goldman had offered them.

"March has been a much harder month than February," said the equity banker. "Investors are definitely more skittish, though transactions are still getting done."

A reduction in global growth expectations and renewed fears of terrorism after the bombings in Madrid last month were two reasons the banker gave for the market troubles.

However, an equity banker not working on the deal said it was not just a poor market that had caused the Telenor trade's difficulties.

"We estimated that for a deal of this size to clear, the price needed to be lower," said the banker. "For an accelerated bookbuild the price to clear would have to have been Eu48, and for a risk trade [bought deal] we thought the clearing price was Eu47.50.

"This deal is another example of sellers taking advantage of the competition in European ECM. But I still fail to understand why they did this trade."

Despite Goldman's difficulties, the banker working on the deal said the Norwegian government should be applauded for the timing of its sale. "The markets on Monday were good, so the decision to sell made sense," he said.

Telenor's share price has risen 107% over the last 12 months, and has increased 14.7% so far this year, outperforming the Oslo stock exchange's all share index.

"All the block trades that have done well this year have been sold after the market close," said the equity banker who worked on the deal. "Selling a block in a live market at the moment is very difficult."

Last July Lehman Brothers sold a 13.9% stake in Telenor for the government. Lehman pre-marketed the deal for two weeks and sold the 250m shares at Nkr29.50, valuing the sale at Nkr7.4bn.

That raised Nkr1.1bn less for the government than Tuesday's sale, which comprised 80m fewer shares. This week's stake represents 9.4% of Telenor and its sale reduces the government's holding to 53%.

The state has mandated DnB Nor to sell up to 30m more Telenor shares to retail investors at the same price as that paid by institutional investors.

The sale increases speculation about the Norwegian government's other holdings.

The government has been reported by the Norwegian media to be considering reducing its stake in Statoil, the national oil company. The government has an 81% stake in the company, which is valued at about $21bn.

Snam block struggles

Mediobanca's sale of 177m shares in Snam also suffered in the market, though according to equity bankers it did better than the Telenor block trade.

Mediobanca bought the Snam stake from Eni after a competitive auction and offered the shares in a range of Eu3.68-Eu3.72. The bank priced the offer at Eu3.70, a tight discount of 0.8% to Monday's closing price of Eu3.73, valuing the stake at Eu655m.

"The deal was quite aggressively priced," said an equity banker in London not working on the deal. "We thought there was huge support for the deal at about Eu3.60 to Eu3.64. However, there is a lot of underweight equity capacity in the Italian market at the moment. It is still unclear how the stock was distributed."

Snam's stock fell 1.3% on Tuesday to Eu3.68, 0.5% below the deal's offer price. But considering the stake was equal to 9% of the company's share capital, this was not a large fall.

The stock remained unchanged on Wednesday and rose slightly yesterday (Thursday) to Eu3.69.

Eni retains a 51% stake in Snam after the sale. However, the company has until 2007 to reduce this holding to 20% of the company's share capital to comply with Italian regulations governing energy companies' cross-shareholdings in the distribution networks.

Eni is also reducing its holding in Terna, the Italian power grid operator, to comply with the law, and is planning to sell a 50% stake through an IPO in May on the Milan bourse. 

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