Issuer: Orange plc
Amount: $700 millionType of deal: equity IPOCompleted: April 3
Lead managers: Goldman Sachs,Dresdner-Kleinwort Benson"I'd like to know what is happening to your
arpoos," asks the female analyst. "I beg your pardon," responds Hans Snook, chief executive of Orange, wondering if this is a rude question. It's not. "Your RPUs - revenues per unit." A typical telecoms question.
But investors obviously liked the responses they got from Snook and his team, because Orange, the UK mobile-phone company, which issued $700 million of equity at the end of March, was 10 times oversubscribed - a result that was all the more surprising because Orange has never made a pre-tax profit and won't until 1998 or 1999.
Orange, the newest entrant to the UK mobile-phone market, and subject of the largest IPO so far this year in the UK, remains a controversial stock to value. Before its share offer was launched in March, investment banks produced widely different valuations of the company, ranging from one hopeful Japanese firm's estimate of £3.9 billion ($5.9 billion) to a more sceptical UK broker's £1.7 billion.
The float was talked about for six months before its official announcement. This was because last August a UK newspaper got hold of the story when a public relations firm leaked a letter inviting it to bid for the mandate.
The eventual winner of the communications mandate, Dewe Rogerson, suggested it might be wise to change the name. The original intention had been to float under the name Hutchison Telecommunications UK plc, a mouthful that hardly throbbed with name recognition. Orange on the other hand, was a brand name - and because of its £30 million advertising campaign a well-known one.
Ironically many bankers and City types did not have Orange phones, however, because it is very difficult to use them while travelling abroad. But Anthony Carlisle, executive chairman of Dewe Rogerson, says word of mouth was just as important. He recalls being at an Eric Clapton concert in London's Albert Hall with Snook when the wife of a blue-chip company chief executive - unaware who Snook was - began talking about the Orange thing that she had received from her husband, and how wonderful it was.
Partly for this reason, the decision was taken just after Christmas to include a retail tranche, targeted at Orange's 400,000 subscribers. A total of 35,000 new small shareholders took up the offer, adding a total of £156 million to demand, just over a fifth.
The shareholders and management decided that a float would serve two purposes: to clear all shareholder loans, and to realize a valuation for the company for the two shareholders - Hutchison Whampoa and British Aerospace.
Lead managers Goldman Sachs and Dresdner-Kleinwort Benson, suggested a value of around £2.8 billion and eventually succeeded with a stock offer valuing the company at £2.45 billion. A total of £700 million was raised - including £100 million from the fully exercised greenshoe.
Hans Snook's comment on the disparity between the valuation and the issue price? "The difference between a good price and a greedy price can be narrow."
Many of the world's largest investors came on board. Over 1,100 placed orders for the sale. Some of these were huge. The six largest lead orders for stock would have been enough to complete the deal. Allocations - which followed the UK treasury's model of ranking investors between one and five - saw group one get 11% of their orders, and group five only 3%.
These investors accepted brokers' methods for estimating the company's worth using the discounted cashflow technique. Because it has been operating only since April 1994 and is still investing in its network, Orange could not be valued on a usual price-to-earnings model. Instead, analysts and investors are looking forward to its likely cashflow and profit in three, five and 10 years' time, and using a discount rate to put a present value on those cashflows.
It's a technique that is becoming more widely used to value early-stage companies such as cable companies and projects like Eurotunnel and Eurodisney, as well as emerging-market telephone companies. In Orange's case, investors were being asked to pay up for future earnings very early in the company's development.
They did so for several reasons. Orange's management team has a clear strategy, to build a national network using the latest digital technology with competitive tariffs and an emphasis on customer service. It enjoys strong rates of growth in attracting new subscribers, lower than average churn (subscribers handing their phones back) and strong brand identity.
Management did a good job of converting sceptical investors, especially in one-on-one meetings during a gruelling three-week roadshow, which took in 35 cities and 130 presentations. Group finance director Graham Howe laughs: "I don't think I would wish a roadshow process on anyone."
By the end, even they had wearied of Orange's "compelling investment story" to the extent that they attempted to reduce their presentations to: "Ladies and gentlemen, the future's bright, the future's Orange [the group's advertising slogan]. Are there are any questions?" None of the Americans laughed, so this did not last long.
The deal went so smoothly that the scariest moment occurred not in a pricing, or even an analysts' meeting but on a snowmobile in Lake Tahoe, California, when - taking a weekend off - the chief executive nearly hospitalized himself and his finance director by colliding with a large tree.
Howe, the 35-year old finance director, might not have made it at all. The schedule for the whole IPO was structured around the date his wife was expected to have their second child. Like a Swiss train she performed with stunning punctuality, and 8lb Jack Benjamin Howe was born at 8am on the morning the prospectus was published, and they were readying themselves to leave for Hong Kong. The birth was considered "good joss", eight being a lucky number in Asia - and both Howe and Snook having arrived at Orange from Hutchison in Hong Kong, the significance of this was not lost on them.
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