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Issuer: Jazztel
Amount: e105 million
Type of issue: Initial public offering
Launched: December 9 1999
Bookrunners: Goldman Sachs and Merrill Lynch
Spain wants a hi-tech stock market. But it doesn't like the
idea of hi-tech stocks. That's what emerges from the sorry saga of
Jazztel's efforts to float in Madrid.
Madrid's loss was Easdaq's gain. The telecom and internet
company's stock was listed jointly on Nasdaq and Easdaq on December
9. The IPO, led by Goldman Sachs and Merrill Lynch, rode the wave
of hi-tech euphoria that swept Europe in the last days of 1999. The
offering was 50 times oversubscribed. The stock was priced at e17
or $17.4 for the American depositary receipt and immediately traded
up to $52 on Nasdaq, closing at $58 on the first day, before
settling back to around $46 or e44 after the first week. The
offering - around 19% of the company's equity - raised just under
e200 million including the greenshoe. "Even by the standards of
recent tech IPOs, this was a home run," says David Jennison of
Merrill's equity capital markets division.
Jazztel spent much of last year planning its IPO, following a
successful high-yield bond issue in April, the launch of a
commercial telephone service to compete with Telefónica in May and
the introduction of Spain's first free internet service in June.
"We wanted to list in Spain," says Jazztel CFO Miguel Salís. "We
see Madrid as the natural home for our listing. But unfortunately
that was not possible within the timeframe of our IPO."
The problem was Spain's stringent listing requirements.
Spanish investors, it seems, can only be trusted to invest in
companies with long and profitable track records. Naturally, that
rules out just about every internet company in the world and
Jazztel, which was set up only in October 1997, is still in the
build-out phase. It has aggressive expansion plans and doesn't
expect to make profits for some time.
But what about Terra, Telefónica's internet arm, which made
its IPO in Madrid in November? A spokesperson for Spanish
securities regulator Comisión Nacional del Mercado de Valores
(CNMV) strongly rejects the suggestion that Telefónica, as the
largest constituent of the Spanish market, was given favourable
treatment. It is true, says the CNMV, that Terra lacks a three-year
track record of profits. But what Terra and other companies such as
Sogecable have is a statement from an independent auditor, in
Terra's case Arthur Andersen, which certifies that the company is
capable of making profits in future.
The CNVM, stresses the spokesperson, is committed to the
development of a hi-tech market, something the stock exchange also
wants to create. But the report produced by Jazztel's auditors was
not acceptable because it was, by the auditor's own description,
only a partial opinion on its future profit capabilities. This
bizarre requirement for companies to provide certification of
future profits is merely a stop-gap measure. The law, insists the
CNMV spokesperson, will soon be changed. Jazztel was given the
opportunity to submit its prospectus to the commission for scrutiny
and wait a couple of months for the ministry of economy to hand
down an amendment to the securities law.
But at this point, with the IPO market looking at its most
buoyant for months, Jazztel lost patience. "The CNMV asked the
ministry to push through the ministerial order on an urgent basis,"
says Salís. "But as this was an important change to Spanish law the
ministry felt it was not appropriate to rush it. We had completed
our pre-marketing by this stage, so we were advised by our
underwriters to go ahead with the IPO on the basis of a listing on
Nasdaq and Easdaq."
It is probably just as well that Jazztel did not list on the
Spanish exchange. The Terra IPO revealed another weakness of
Spanish securities regulation. According to the rule book, any
price move of more than 15% in one day triggers a suspension of
trading in that stock for the rest of the day. Terra, which was
listed jointly on Madrid and Nasdaq, spent most of its first day
suspended in Madrid but still actively traded on Nasdaq, creating
substantial arbitrage opportunities for those who had the reach to
play the two markets against each other. Jazztel would have
suffered the same fate.
Bankers who underwrite hi-tech IPOs despair at such rules.
"You can't arbitrate what constitutes a right or wrong price move,"
says Jennison at Merrill Lynch. "Clearly you need the sort of
price-discovery process we had on Nasdaq."
Although the Jazztel IPO took place on both Easdaq and
Nasdaq, the stock was listed on Nasdaq a few minutes before it
began to trade on Easdaq. The reason is that Easdaq is far from
liquid. In fact, the Jazztel listing was something of a coup for
Easdaq. It was one of only 12 IPOs on Easdaq last year, most of
which were in the first half of the year. A number of companies
have chosen to list on Germany's blooming Neuer Markt rather than
Easdaq and many equity traders believe Nasdaq's coming push into
Europe will sweep Easdaq aside for good.
Nobody involved in the deal can summon up much enthusiasm for
Easdaq, an exchange on which neither of the two underwriters acts
as market-makers. It was simply the only available source for a
country-neutral European listing.
A listing on Frankfurt might have sent out the wrong signals
to Spanish investors. And, as one equity banker says of the Neuer
Markt: "We've all seen how it can be dominated by spivvy German day
traders. No company wants to place its fate in the hands of a bunch
of Frankfurt taxi drivers." Most trading in Jazztel shares takes
place on Nasdaq, the greater liquidity reflected in the fact that
the company trades at a small discount to its price on Easdaq.
The Spanish securities market, with its slow moving plans to
embrace the internet age, has been badly caught out by the speed of
Europe's hi-tech boom. "The most noteworthy feature of this deal
was the following wind," says Jennison. "While this deal was under
way the price of Versatel, which is probably the most comparable
stock to Jazztel, rose by 77%. And more established telecoms stocks
are up by more than 30%. Nokia's market capitalization has doubled
in just eight weeks. It's all very different from, say, September,
when tech stocks were not moving at all."
Encouraged by the strong investor demand for its equity,
Jazztel decided to complete another high-yield bond issue on the
same day. The issue, originally planned for e150 million, was later
increased to e300 million and finally came out at e400 million.
Despite its bitter tussle with the authorities, Jazztel still
wants a listing in Spain. It hopes to introduce its shares to the
Madrid market through a parallel listing of existing equity as soon
as the authorities have changed the rules to allow it.
But Salís does not want to be part of a Spanish version of
the Neuer Markt. "We want a full listing," he says. "We believe it
would be a mistake to create a niche stock market. There is not
sufficient liquidity for that in Spain."
Salís worries that there are so few hi-tech companies in
Spain that any Spanish "nuevo mercado" might be dominated by two
companies: Jazztel and its rival Terra.
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