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Bankers contest 10-among-20 obstacle

31 May 2002

The reform of a law that has shattered the hopes of many companies looking to raise money through a secondary offering of shares in France is once again at the forefront of debate. Bankers have struggled for a long time against the 10-from-20 law, which states that a secondary offering of primary shares without rights cannot be priced below the average of 10 closing prices chosen from 20 days before the close of the offering.

And despite the range of prices that banks have to choose from, the law has prevented many smaller cap companies from raising money on the equity markets.

Bankers are able to price the offering off five different prices: the open, the close, the intraday high and low and the volatility weighted average price. But despite this choice bankers have still struggled to get some of these deals completed.

When Penauille Polyservices, the French airport services group, came to the market in April with its Eu160m secondary offering via BNP Paribas and Crédit Agricole Indosuez Lazard, the banks were forced to pull the deal because of a sharp slump in the stock price.

When Penauille announced its issue on April 2 its shares were trading at around Eu38. Just over a week later, when the offering was cancelled, the shares had slumped to Eu33, down more than 13%. Had Penauille wanted to complete its offering the shares would have been offered at a premium to the market price.

To counteract this difficulty of the 10-among-20 rule A Novo, the industrial maintenance service for high tech equipment, adopted a warrants structure for its Eu70m follow-on offering at the end of April. Having seen what happened to Penauille, A Novo chose to issue warrants alongside its secondary offering to give greater flexibility to the pricing of the issue.

In A Novo's case, by issuing warrants the company had a 1%-2% pricing flexibility on the issue, but even this could not save an offering which saw the stock price crash nearly 20% throughout the offering period. Were it to have completed the deal A Novo would have had to price its issue at a more than 10% premium to the market price.

But where Penauille Polyservices and A Novo failed, Bacou-Dalloz, the protective equipment maker, came up with a structure that managed to get round the problems of the 10-among-20 ruling.

Bacou-Dalloz initially offered free warrants to all existing shareholders allowing them to subscribe to the deal. Some of the major shareholders, representing around 80% of the shareholder base, had previously agreed to give up their warrants to Crédit Agricole Indosuez Lazard and ABN Amro Rothschild, which were leading the deal.

The banks then set about selling the shares, obtained from the exercise of these warrants, to the market. The issuing of warrants that convert into shares enabled the banks to complete the deal in a much shorter time than a traditional rights issue would have allowed and gave greater flexibility on pricing. Bacou-Dalloz was allowed to price its deal either according to the 10-among-20 rule or within the trading range on the day the deal was priced.

The issue, hailed as a benchmark transaction by French bankers, was finally priced at the bottom of the trading range on the pricing day and raised Eu188m for the company. This structure now looks like being adopted for a number of other transactions until there is a change in the law. "The structure of the Bacou-Dalloz deal is not ideal because the structure is complicated," says David Douglas, head of French ECM at Lehman Brothers. "But it will be used in the short term until the law changes."

This has been confirmed by Carlos Conde, the London-based head of ECM at SG, who says that the banks leading the Eu3bn follow-on offering in Vivendi Environment are looking to use a similar structure.

Deutsche Bank and SG have been appointed to lead the jumbo offering in Vivendi Environnement, and because the majority shareholder Vivendi Universal is selling the stake the banks are in the fortunate position of being able to adopt the Bacou-Dalloz structure. "We are looking to get around the 10-among-20 rule with the Vivendi Environnement offering by issuing warrants," says Conde. "Bacou-Dalloz used this structure first and since then we have been validating it. But the structure only works if you have a majority shareholder who is willing to give away warrants and does not mind diluting their holding." *

31 May 2002