Investment bankers in Spain are asking themselves where their next $500 million is coming from. That is at least how much they have earned so far from the sell-off of Spanish state assets. The programme ranks as the fifth-biggest in the OECD after the UK, Italy, France and Australia, with the Spanish state collecting Pta1.8 trillion ($11 billion) in privatization receipts.
This year the elephant transactions will virtually come to a halt, with the disposal of large stakes in national grid Red Eléctrica, defence electronics group Indra and Iberia airlines, together worth perhaps $2 billion. On the face of it the outlook would seem a bit alarming for the banks: how to justify and continue paying for all those expensive investment bankers and research analysts who were put in place when things were so buoyant, and in an overcrowded market where in the past state privatization agency Sepi would invite 30 banks or more to bid for mandates.
For most bankers the answer is a shift in strategy - a focus on smaller private transactions offering more lucrative fees. "It's going to be a tougher environment, particularly for those of us who were most active in the heyday of the privatization programme," says Enrique Casanueva, managing director and head of corporate finance at Santander Investment.
The investment-banking arm of Banco Santander accounted for about a fifth of total privatization receipts paid out in the past two or three years, as global coordinator of major deals such as state oil company Repsol, steel producer Endesa and banking group Argentaria. "Investment banks will have to adjust to the new situation and I am confident that private deals will generate the best fees," says Casanueva.
He cites the case of Ferrovial, Spain's second-biggest contractor, a privately owned group that is one of the next in line for a stock-market listing. The offering is valued at an estimated Pta150 billion, on a par with Repsol's Pta150 billion secondary offering in 1997 or last year's Pta284 billion privatization of Tabacalera. "However," says Casanueva, "here we are looking at a fee structure in the range of 3%, about twice what the state is paying for privatized assets."
Logically, investment banks can squeeze a higher fee out of smaller private transactions since they do not have to deal with the government's concerns about transparency. "Government fees were forced down by the intense competition but also because politicians needed to cover their backs to avoid exposing themselves to accusations of overpaying the global coordinators," says a Spanish banker.
Santander's Casanueva is confident that investor interest will keep the private and family-owned company sector buoyant for several years, particularly in areas that are underrepresented in the Spanish market or where there is a high level of fragmentation.
"We obtained the mandate as sole adviser to Enatcar, the coach company that will be coming to the market in the near future," he says. "There were an amazing amount of enquiries from domestic as well as foreign investors." About 30 groups expressed an interest in the company, including British, French and Portuguese investors.
An original valuation of Pta12.5 billion was placed on Enatcar and this has now zoomed closer to Pta28 billion, a smallish deal by privatization standards but one that carries a fee of at least 3%. "Fees had taken a tremendous beating but now some middle-market deals are becoming quite attractive," says Casanueva. "You can make $1 million on a relatively small transaction."
Bankers are also beginning to jostle for some surprisingly big business among Spain's privately owned corporates. Clothing retailer Zara, Spain's fifth-largest company, has decided in principle that it will seek a listing and bankers have hung a price tag of at least $6 billion on it. This is a classic example of an almost unknown gem in the private sector, owned by Amancio Ortega, a publicity-shy entrepreneur from La Coruña and one of Spain's wealthiest men. One Spanish investment bank is providing Ortega with preliminary advisory work free of charge in the hope of obtaining the mandate.
M&A activity, real as well as rumoured, is helping to keep the banks busy in the absence of privatization income. Press reports of merger talks between Spanish and French tobacco giants Tabacalera and Seita had advisory teams on the edge of their seats for a few days, says a US investment banker in Madrid. "It hasn't happened yet but it's no secret that both companies need to acquire critical mass in the euro zone," he says.
Financial services consolidation
The recent merger between Banco Santander and Banco Central Hispano was the first step in a likely round of large-scale consolidation in the financial services sector. In the same week, Argentaria's chairman, Fernando González, made it clear that his bank was "open to proposals", and Banco Bilbao Vizcaya's (BBV) chief executive Pedro Luis Uriarte was assuring the market that 1999 could be a year of "surprises".
Isabel Bermejo, deputy director of investment bank BBV Interactivos, foresees a second round in large-scale advisory activity. "The first stage is coming to an end with the final sales of state assets," she says. "We are now looking at forthcoming legislative changes that will allow entities like the savings banks, which account for half of the country's financial system, as well as the state railway Renfe, to go public."
Jorge Calvet, managing director of Warburg Dillon Read's Madrid office, says a key strategic element must be to keep an eye out for opportunities among its customers. The bank is focusing research on mid-cap companies and hiring to beef up its team of five analysts. "When dealing with privately owned companies it is crucial to be considered an adviser you can trust as well as a top execution house," says Calvet. "People in the private sector are seeking good advice, not just bodies round a table. We devoted a lot of time to the big privatizations and now we are building up our relationships with privately owned companies. For example, we are finalizing the paperwork for General Optica, a privately owned chain of opticians with a valuation of Pta40 billion to Pta50 billion. This is a growth story and we are confident it will attract international investors."