Issuer: Matav
Amount: $773.9 million
Launched: November 13 1997
Global coordinators: Merrill Lynch, Credit Suisse First Boston
Another month, another bear market, another telecoms privatization. Hardly a week has gone by since September without a government somewhere getting ready to sell off its stake. Portugal Telecom and France Télécom got in first, and just avoided the turmoil which hit equity markets worldwide in mid-October. Telecom Italia was not so lucky, and also had to cope with BZW, its global coordinator, being sold off, and a mini-crisis for the government. Equity offerings from China Telecom and Telstra in Australia added to the telecoms bonanza.
But if any telecoms IPO in the middle of the bear run would raise eyebrows, Matav must surely have been it. Three months ago, an IPO from a central or east European company, especially from one of the Visegrad states (Czech Republic, Hungary and Poland), would have encountered little trouble in being placed with investors at home and abroad. And Matav had the prestige of being about to issue the largest IPO to date from an east European country, and the first to list on the New York Stock Exchange.
The company had spent four years building up its reputation in preparation for an IPO. The Hungarian government first appointed advisors to help restructure Matav in the middle of 1992. The following year, CSFB was brought in to assist in selling a 30% stake for $875 million to MagyarCom, a joint venture between Matav, Deutsche Telecom and Ameritech of the US. Two years later, MagyarCom bought another 35% stake for $852 million. As a result, Matav had two experienced strategic foreign investors deeply involved in developing the business: a representative from both Deutsche Telekom and Ameritech sit on the board.
What has also impressed potential investors, say the global coordinators, is the way in which the government and the company have adhered to strict, transparent regulatory standards since the decision to start selling the government stake was first taken in 1992.
The decision to float Matav this year was effectively taken in January, when Merrill Lynch was appointed as global coordinator by MagyarCom. It soon became clear that the government would also be a significant seller (it still held a stake of more than 24%). CSFB, which has worked closely with the Hungarian government in the past, was chosen as a second global coordinator in July.
It was then that the fun began. The first order of business was to sort out the tariff structures. In central and eastern Europe most telecoms companies are still in the process of reweighting their tariffs: domestic tariffs are generally subsidized by the government, and paid for by charging more for cross-border calls - a situation which international investors would rather have cleared up before the offering. Also, in the past Matav would make public its tariff structure for the following year only. To appeal to international investors, particularly those in the US, the prospectus for the issue would have to present the structure for the next three years. "To get this done we had to get the company together with the ministers of finance and telecoms," says Doug Rediker, a director in investment banking at Merrill Lynch. "And we only got the agreement on September 7, just one day before the first research analysts' presentation to investors."
Then came a market correction, and another, and another. Received wisdom was telling us that investors were taking their money out of equity, especially emerging-market stocks, and either keeping it as cash or buying into safe debt issues. And yet Matav started its Hungarian roadshow on the day the Dow Jones index took its big hit - October 27. The international roadshows started a day later. Global coordinators Merrill Lynch and Credit Suisse First Boston have stuck to a consistently bullish line: "I've worked on many, many emerging-market equity issues, and this is one of the strongest stories I've seen, certainly in Europe," says Rediker at Merrill Lynch. "If you were a company wanting to do an IPO, you'd want to adopt their strategy."
Given all the previous telecoms equity offerings, and the hits taken by stock exchanges worldwide, would it not have been prudent to postpone the deal? No, says Crispin Osborne, a director in equity capital markets at CSFB: "We and Merrill had undertaken an exhaustive bookbuilding process following the announcement of the price range. The demand we had generated demonstraed a very high level of commitment to the offer from a core constituency of investors. Postponement was never more than a distant option."
In fact, although some of the major investors scaled down their orders, the deal was oversubscribed. In any case, postponing would have been risky. "Pulling out after getting such huge interest would have lost the company credibility," says Rediker. "Why would an investor trust us next time around? And there was no way we could know if the markets would get better or worse. After the Mexican Peso crisis at the end of 1994 there were no Latin American IPOs for 18 months."
There could not have been a more torrid time to market the shares, though. The Budapest stock exchange had been relatively resilient in the face of the initial ructions around the world, but in the final week of bookbuilding the index fell by 20%, and by 13% on the day the deal was priced. This inevitably had an effect on the price. The range had been put at between Ft730 ($3.77) and Ft845 during pre-marketing, and was eventually priced at the bottom end of the scale. Although this is less than they could have achieved in the bull markets a few months before, the banks and the issuers did not consider pulling the deal. "Both the management and all the shareholders had a very good understanding of market conditions," says Osborne. "They had followed the price performance of their peer group, and were quick to recognize that Ft730 a share represented a premium valuation to other telecoms companies." It was arguably a better premium than they might have achieved before the crash.