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Spanish market outshines its peers

28 Oct 2004

The Spanish equity capital markets have enjoyed a welcome return to business this year, across IPOs, capital increases, rights issues and block trades. M&A activity in the banking industry has increased dealflow, while attractive companies have enlivened the IPO market. And even if sentiment in the equity capital markets remains shaky, bankers are confident that in Spain at least the good times will continue.

According to one banker in Madrid, the nature of the Spanish equity capital markets means that when it rains, it pours.

?The years 2002 and 2003 were particularly hard ones in the equity capital markets in general,? he says, ?and because Spain is one of Europe's smaller markets, when conditions are unfavourable you can quickly see the number of deals fall from something like 10 a year to almost zero.?

Indeed until April this year no IPO had been brought to the Spanish market since that of Enegas in June 2002.

But fortunately for the banker and his peers, the sun that has shone on the European equity capital markets this year has been particularly bright in Spain.

?There has been a good mix of deal types,? says Manuel Esteve, vice president of Spanish equity capital markets at JP Morgan in London, ?with a balanced mix of primary offerings, IPOs, secondary sales. There has been quite a high level of issuance versus recent years and a renewed level of interest by issuers to tap the equity markets.?

Although the market, as elsewhere in Europe, has been far from easy, it has provided some of the highlights of the year on the continent. ?We had clearly hoped to see a significant pick-up in equity capital markets activity in Spain this year,? says Stefan Lindemann, head of capital markets origination, Iberia at Dresdner Kleinwort Wasserstein (DrKW) in London, ?and although the market has been a little choppier than expected, high quality transactions have definitely worked as long as they have been skilfully and correctly executed.?

One of the most active sectors, especially when compared to flows elsewhere in Europe, has been in the banking industry. ?Overall the market has probably been busier than one would have expected,? says JP Morgan's Esteve, ?and the main reason for that is that there were a number of M&A related trades in the financial sector. The visibility on those is obviously quite limited beforehand.?

Banco Santander Central Hispano's successful £9bn takeover bid for the UK's Abbey has been the most visible move in the industry. However, while some ECM business has resulted from the bid, two of Santander's rivals captured the headlines with M&A related equity offerings early this year.

Sabadell sets the stage
The first was Banco Sabadell, which in early January launched a Eu1.2bn capital raising exercise to fund its Eu1.5bn acquisition of Banco Atlántico. Sabadell was purchasing the stock of the Barcelona-based bank's two biggest shareholders ? Banco Bilbao Vizcaya Argentaria (BBVA) and the Arab Banking Corp ? and preparing to make a public tender for the rest of Banco Atlántico's shares.

The capital increase was split into two tranches of 51m shares, a four-for-one rights issue for existing shareholders ? mainly Spanish retail investors ? and a marketed placement of 51m shares aimed at Spanish and international institutional investors.

The shares in the rights issue were sold at Eu10.83 on the first day of March, a discount of 43% to the close on January 29, when the terms of the deal were announced. The institutional offering was priced at Eu14.75m a share, a discount of 6.3% to the close at the end of January.

Citigroup was global co-ordinator, joined by BBVA, La Caixa and Santander as bookrunners for the rights issue and Spanish institutional offering, while JP Morgan and UBS came in to sell to international investors.

The successful execution of the deal was seen as notable for both Sabadell and the market. The bank has since entered the Ibex 35 index and gained over 350 institutional accounts from Spain, Europe and the US through the exercise.

?This was a very important deal for Sabadell,? says Marcelino Garcia, executive director in ECM at UBS in London. ?Previously, it had been a smaller bank, but the purchase of Banco Atlántico made it a major player. It had not been in the Ibex 35 nor had any institutional shareholders, both of which it can now claim. It was therefore almost like an IPO for them.?

The structure of the deal also led to it being described as one of the most interesting transactions in the European markets for some time. ?Although it was a capital increase to pay for the Banco Atlántico purchase,? says Esteve at JP Morgan, ?it was a combination of a traditional rights offering with a bookbuilt offer to new investors. It was therefore one of the most innovative deals that there has been this year, even within a European context. You don't see new structures in this product every day, but the Sabadell deal was definitely an example.?

BBVA quick out the blocks
In the meantime, between the announcement and closing of Sabadell's deal, BBVA had stormed the Spanish stock market to raise Eu2bn though the issue of 195m new shares.

Like Sabadell, BBVA's capital raising was prompted by M&A activity and the sale was in fact only the latest move by the bank to raise funds. BBVA was purchasing the 40.3% of Bancomer, Mexico's largest bank, that it did not already own for Eu3.3bn and had in the three months ahead of the Eu2bn sale raised Eu1.4bn from disposals of its industrial portfolio to fund the bid as well as Eu466m from disposals of non-core financial holdings.

The omens for the share sale were good, with analysts supportive of the purchase. ?From a pure strategic point of view, we believe the deal makes perfect sense,? wrote analysts at Credit Suisse First Boston (CSFB). ?Buying the minorities of a bank already managed by the group in a growing market in which the capital cycle is turning structurally positive, is arguably one of the best investment alternatives BBVA had.?

The sale itself did not disappoint.

Lead manager Morgan Stanley sold the shares through an accelerated bookbuild in just under five hours, closing the books 1.7 times covered. The shares were sold at Eu10.25, a discount of 2.2% to the previous day's close of Eu10.48.

Half the deal was bought by UK-based accounts, while Spanish investors took 20%. US demand was strong, but constrained by regulatory issues.

?BBVA has received a very positive response to the acquisition of Bancomer, which is reflected in the investor demand for this issue,? said an ECM banker working on the deal in London at the time. ?The market agrees that they are buying at a good time ? investors want to give money to companies that are going to do good things with it. It's all about value creation.?

Looking back on the deal, Michael Schaftel, head of equity syndicate at Morgan Stanley in London, says that after all the work that went into the M&A transaction, it was rewarding to see the deal go so well.

?We had worked with BBVA for over a year on structuring the M&A transaction that made the primary raising a necessity and then on restructuring their industrial holdings portfolio,? he says. ?So to have been able to execute what was the largest one day primary capital raising in Europe so cleanly and successfully for them was very satisfying.?

Santander cuts RBS stake
The only equity offering to emerge as a result of Santander's bid for Abbey has been the sale of a 2.51% stake in Royal Bank of Scotland. Merrill Lynch ? which is advising Santander on the takeover bid and is also RBS's corporate broker ? completed the £1.3bn sale in mid-September.

The stock was offered in a range of £15.50-£15.60, a discount to the previous day's close of between 2.3% and 2.9%. The sale was executed comfortably and priced at £15.50.

A syndicate official at Merrill Lynch said the deal had attracted a similar type of investor to those who bought shares in a £.2.5bn equity offering RBS had completed in May, although many of the accounts were different.

?It's pretty amazing that RBS could tap the market for £2.5bn in May, and only four months later Santander can raise another £1bn in the stock,? said the banker. ?Had it not been for the previous deal we might have been able to get a tighter discount. As it is, the client is happy with the price we achieved.?

Spanish Issuers of all ECM
January 1, 2004-October 25, 2004
BookrunnerTotal (Eu m)DealsShare %
Morgan Stanley2,101.40433.76
Banco Bilbao Vizcaya Argentaria697.57311.21
Dresdner Kleinwort Wasserstein587.8629.44
JP Morgan562.3729.03
Banco Santander Central Hispano305.3624.91
Caja Madrid250.2714.02
Deutsche Bank196.4613.16
Credit Suisse First Boston170.522.74
Source: Dealogic

Rather than a funding exercise, the sale of roughly half of Santander's previous 5.05% stake in RBS was designed to smooth the way for the Abbey takeover by removing what could have been perceived as an obstacle by European competition authorities. The UK's HBOS, which considered a counter-bid for Abbey, had already complained about the cross-shareholding. The remaining 2.54% stake is seen as too small to trouble the competition authorities.

As well as reducing its RBS stake, Santander said that it would end its strategic alliance with RBS, under which each bank had members on the other's board. ?Our alliance has historically always included cross-directorships, but both we and RBS have recognised that these would be inappropriate in the event that Banco Santander's agreed offer for Abbey is successfully concluded,? said Emilio Botín, chairman of Santander.

?Accordingly, we have agreed that the cross-directorships between RBS and Banco Santander would cease in those circumstances, as would any special arrangements with regard to joint ventures and commercial co-operation.?

Fadesa opens IPO fiesta
While the banking industry may have provided a quasi-IPO, the largest one day primary capital raising in Europe, and the most exciting takeover on the continent this year, it was housebuilder Fadesa that reignited the IPO market in April after 22 months of inactivity.

Fadesa itself had been a victim of the poor market conditions in recent years ? the company postponed its IPO in June 1999 because of market volatility and the bear market of the past three years prevented it from making a second attempt.

Its intention to come to market in the second quarter emerged in January, although the company, Spain's largest unlisted construction company, had already announced that it was intending to float.

But early suggestions of the company's intentions were wide of the mark. Initially, a sale of 40% of Fadesa for some Eu260m, with estimates of the company ranging from Eu500m-Eu800m fell well short of the eventual result.

When BBVA, CSFB and Morgan Stanley did launch the IPO in mid-April, a Eu462m figure was announced. The company's plan was to sell some 37m shares ? some 33% of Fadesa ? at Eu11-Eu12.60 each, valuing it at Eu1.225bn-Eu1.403bn.

Although familiar concerns about the sustainability of the Spanish housing boom surfaced, Fadesa was widely believed to have a good chance of successfully re-opening the Spanish IPO market.

?Fadesa has unusually strong growth characteristics,? said one banker working on the deal. In 2003 Fadesa reported net turnover of Eu520m, up 14.8% from Eu453m in 2002. In the previous year Fadesa increased turnover by almost 100%. Net profit in 2003 was Eu85m ? up 54% from 2002.

The backdrop for the offering was also favourable. As well as the equity deals executed in Spain earlier in the year, the wider context was improving. ?The European average market gain since the beginning of the year is 3%,? said one banker. ?The Ibex is up around 7.5% since the beginning of the year ? it has significantly outperformed ? and it has been a relatively low volatility market compared to elsewhere in Europe.?

Fadesa built on these foundations to conclude a successful sale at the end of April. The 36.5m shares were sold towards the top of the range, at Eu12.40, valuing the company at Eu453m.

An international institutional tranche that constituted 15.6m shares, or 42% of the deal, was 22 times covered, while the retail offer, making up 14.5m shares, or 40%, was 11 times covered. Domestic institutions covered their 18% share 19 times.

One banker involved in the deal said that the company's fundamentals had been the driving force behind the success of the IPO. ?It was clearly an attractive value proposition,? he said. ?It's always hard to value property, but on a net asset valuation basis the range was deemed reasonable.?

Telecinco gives a high five
Spain was once again able to stand out in still fragile equity capital markets in June when Telecinco's IPO became one of the most impressive European ECM deals of the year.

The Spanish television broadcaster's shareholders had in March said that they would float between 25% and 35% of the company and appointed Dresdner Kleinwort Wasserstein, JP Morgan, Morgan Stanley and Santander to lead the sale. The decision was taken when two of its four shareholders ? Dresdner Bank with a 25% stake and Dutch private equity company Ice Finance with 10% ? decided to sell shares. The two other shareholders were Mediaset, part of Italian prime minister Silvio Berlusconi's media holdings, and Spanish private equity company Vocento, which had stakes of 52% and 13% respectively.

The deal was launched in early June, with the leads setting a range of Eu9.35-Eu10.15 for the sale of 74.2m shares. With Dresdner and Ice disposing of their entire stakes, the 35% sale was worth Eu694m-Eu735m.

Investors immediately reacted positively to the valuation. The range implied an Ebitda multiple of 10 to 11, against a sector average of between 11 and 12. The market's positive response was also reflected in grey market trading, its shares trading from Eu10.35 to Eu11.35.

Few market participants were surprised when the IPO was priced at the top end of the range in late June, after the deal was 20 times oversubscribed. The pricing put the company's value at Eu2.5bn. Institutional accounts bought 49.2m shares and retail 24.7m. The shares then rose 18.2% on the first day of trading to close the day at Eu12.

The success of the transaction heartened those involved in the Spanish equity markets. The IPO was executed at the same time as Postbank was negotiating a troubled route to market, and those working on the Telecinco deal were clearly happy with how smoothly their deal got away.

?Back in May deals were being pulled left, right and centre, and there were several repricings, lowering of ranges, and pricings at the bottom end of the range,? says Esteve at JP Morgan. ?Telecinco, however, was successful because it was a very strong company coming to the market at a reasonable price, and the combination of the two made for the most successful IPO of the year of any significant size in Europe.?

Alvaro Vazquez, head of corporate finance and origination, Spain at DrKW in London says that key to the deal's execution was the attractiveness of the equity story and fair pricing. ?The price range was realistic and as a result we ended up pricing it at the top end of the range,? he says. ?Particularly in these markets, if you are too greedy and push too hard then deals don't work, but on Telecinco the market felt that it was getting a fair deal.?

Other market participants are more blunt. ?It was just plain cheap,? says one. ?It could have been all sold on the first day as people were knocking down the door for it.?

Probitas fails to deliver
However, anyone believing that the deal was a giveaway should perhaps bear in mind the troubled fate of some of the transactions that succeeded Telecinco into the market. Among those finding the market's too challenging was Probitas Pharma, a Spanish blood plasma supplier.

The company had in mid-May announced its intention to float around 40% of its shares to domestic retail and institutional accounts as well as international investors via BBVA, Deutsche Bank, Santander and UBS. The offer was to comprise new and existing shares and include a greenshoe of 15% of the total offer size.

But the company was forced to cancel its offering just two days before trading was due to begin on the Madrid stock exchange. The leads had hoped to sell 108.8m shares in a range of Eu2.70-Eu3.30 to raise around Eu360, valuing the company at some Eu700m. Demand, however, proved insufficient, particularly from international investors, despite Probitas being valued at a discount of 10%-20% to its peers.

?The main reason was the timing,? says one banker who worked on the deal. ?They were unlucky because it was probably the worst week of the year. The other IPOs being done were either pulled or had their price range cut sharply, and there was a kind of fatigue for IPOs among investors.?

But some say that the problems were more company-specific. ?It was not an easy story to understand,? says one. ?The whole blood plasma sector is complicated and mostly involves large cap companies rather than something as small as Probitas. It was a tiny deal in a very specialised sector at the wrong price at the wrong time.?

Other bankers argue that although not a mere result of general market conditions, the IPO did suffer from difficulties in the biotech sector.

Still open for business
Companies looking to raise equity capital today will also have to tread carefully, say bankers, although opportunities exist for well-executed deals.

?Generally the IPO market is still very fragile,? says Schaftel at Morgan Stanley, ?and although there is a tremendous amount of liquidity in the market ? as demonstrated by the big trades for France Télécom, Sanofi, RBS, TPG and Total ? the mood does change a bit when it comes to IPOs and the bar is raised a little.

?That said, if you look back at the performance of the IPOs that have been done this year, they have done very well and outperformed in a difficult market. That is extremely helpful because people have been quite cynical this year, and it shows that business can still get done.?

Spanish ECM issuers
January 1, 2004-October 25, 2004
Pricing dateIssuerEu Amt (m)BookrunnerShare type
Feb 4BBVA1998.75Morgan StanleyAccelerated bookbuild
Mar 1Banco de Sabadell1304.59Citigroup, JP Morgan, UBS
Jun 22Gestevision Telecinco862.85Dresdner Kleinwort Wasserstein, JP Morgan, Morgan StanleyInitial public offering
Apr 13Corporacion Mapfre500.55Citigroup, Caja MadridRights
Apr 29Fadesa Inmobiliaria455.71BBVA, Credit Suisse First Boston, Morgan StanleyInitial public offering
Feb 13Amadeus Global Travel Distribution393.90Dresdner Kleinwort WassersteinAccelerated bookbuild
May 6AGBAR238.09Credit Suisse First Boston, La Caixa, BNP ParibasAccelerated bookbuild
Jan 20Union Fenosa217.30Morgan StanleyBought deal/Block trade
Feb 27Ebro Puleva196.46Deutsche BankAccelerated bookbuild
Oct 21Telvent GIT62.73Merrill LynchInitial public offering
Jul 1Gamesa Corporacion Tecnologica53.91CitigroupAccelerated bookbuild
Oct 7RNG48.06BMO Nesbitt BurnsUnits
Source: Dealogic
Cintra will hope to avoid the market's pitfalls when it executes its IPO in October. As this report was going to press, BBVA, Citigroup, Merrill Lynch and Santander were preparing to sell 186.5m shares in a range of Eu8.24-Eu8.80, valuing the company at Eu4bn-Eu4.3bn.

The deal was said to be going well, with both the domestic and international books easily attracting demand. This appeared to show that any concerns about the company's story were overdone. There had been some fears that Cintra's business ? which focuses on toll-roads, but incorporates 16 sub-businesses including running car parks ? might prove too complex for investors.

The IPO provides an exit for Australian infrastructure fund Macquarie Infrastructure Group (MIG), which has a 40% stake in Cintra. MIG will swap an 11.99% stake with Cintra's majority shareholder, Spanish construction company Ferrovial, which holds 60% of the company. Ferrovial will give MIG its 13.87% stake in Canadian toll road operator 407 Express Toll Route.

The deal was due to be priced on October 25.

Back to the grindstone
Once Cintra's IPO is completed, the market could settle down to a pace more akin to recent years, with no obvious IPO candidates in the pipeline.

Spanish industrial and technology company Abengoa was preparing an IPO of its information technology subsidiary Telvent as this report went to press, but is listing it in the US. The offering will be of 8.7m shares in a range between $12.50 and $14.50. Merrill Lynch is bookrunner, Lehman Brothers joint lead manager and SG Cowen co-manager.

Other potential IPOs are considered some way off, such as the hoped for spin-off of mobile business Auna Amena by its parent Auna. ?The pipeline is not very exciting at the moment,? says one banker. ?There is still talk of Auna Amena, which is the big price for Spanish ECM, but that has been going on for ages. I don't know if it will happen in 2005 ? 2006 seems more likely.?

The unwinding of cross-shareholdings by Spain's big commercial banks is expected to continue in a variety of guises, but with public finances in good shape, the government is not expected to sell off any of its holdings.

Finally, as in other parts of the financial markets, bankers are hopeful that consolidation in the banking or utility and energy industries could require financing.

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28 Oct 2004