Issuer: Telecom Italia
Amount: $11 billion
Type of offering: Secondary share placement
Lead manager: October 27 1997
Global coordinators: BZW and Mediobanca
“Working on an equity offering is like flying into Hong Kong,” said an equity capital markets managing director recently. “The pilot might fly well for 13 hours, but you’ll soon forget all that if the pilot strays close to the rooftops and gives you a bumpy landing.” The secondary offering for Telecom Italia – the largest secondary offering to date must rank as one of the bumpiest landings ever.
It had all started so well for BZW. The firm had already built up a good relationship with IRI, the Italian industrial holding company, mainly through the work of Bernardo Attolico, the director responsible for BZW’s corporate finance arm in Italy. Stet, the majority shareholder in Telecom Italia, was BZW’s chance to prove its worth in telecoms. The team had been the UK lead for the Tele Danmark offering in 1994, and had created enough interest to raise the investment required for the whole deal. But not being included in the syndicate for Deutsche Telekom had hit hard. So great effort went into winning the Stet mandate. When BZW pitched for the deal in early 1995 it rolled out the whole team: Attolico, Charles Kirwan-Taylor, managing director in the equity capital markets group, capital markets head Amir Eilon, Richard Gillingwater, the head of corporate finance, and top-rated telecoms analyst Richard Millington. Martin Taylor, the chief executive of the Barclays Group, introduced the presentation in Italian.
When the mandate was awarded in July 1995, some were quick to assume that BZW had won by default because the bulge-bracket houses did not pitch: Morgan Stanley was adviser to IRI while Goldman Sachs was busy on Deutsche Telekom. Kirwan-Taylor rejects this: “At least eight houses pitched hard for the mandate, including Salomon Brothers, Lehman Brothers and Warburg, which had led the British Telecom deal. We won it outright on our privatization record, our telecom research capability and our ability to execute secondary offerings such as GenCo.”
No one thought that the process would take two years. “When we won the mandate back in July 1995, we all expected to complete the deal before the end of the year,” explains Kirwan-Taylor. But this is Italy, a country not known for its political stability. In 1994, media baron Silvio Berlusconi ruled the roost. His short reign ended in scandal that year, and in October 1995 he was indicted to stand trial on charges of embezzlement and fraud. The regulatory authorities decided not to draw too much attention to the media industry and, by extension, telecoms. The second round of privatization for Stet was postponed.
And from early 1996 the focus of the Italian government changed. The emphasis was placed on restructuring Stet and other industries up for privatization. The Italian treasury took control of the Stet privatization and embarked on a series of measures to increase its value. New management was brought in, the Seat telephone directory business was spun off at the end of 1996, and Stet was merged with Telecom Italia this June.
The restructuring delayed privatization, and added to the workload. “The philosophy and the structure of the company was changing rapidly,” says Millington. “So we spent much of the last 10 months explaining this to potential investors.” Roadshows were organized to do this: one in March this year on Telecom Italia Mobile, and one covering Telecom Italia in July. The documentation also had to be updated, which kept Attolico busy right up to the pre-marketing period. “A lot of the documentation dealt solely with disclosure,” he says. “But it was not particularly investor-friendly. What I and my team had to do was include information on comparable telecoms privatizations such as Deutsche Telecom and Telefonica, as well as provide a relevant analysis of the developments in the company we were privatizing.”
By August, the way looked clear for a relatively problem-free deal for the autumn. Although the secondary listings schedule was looking slightly crowded, with Matav and Portugal Telecom coming to market, one competing offering, France Telecom’s IPO, had been postponed in May. But on September 11 the French government announced that the privatization would restart immediately, following virtually the same timetable as Telecom Italia (it was to go just a few days before).
Yet Italian officials had previously discussed the matter with the French, and had the impression that Telecom Italia alone would occupy the marketing spot after the summer. “We were surprised that no discussions had taken place about the change,” says Kirwan-Taylor. “We observed all the usual protocols, but they just went ahead and announced the deal was back on without telling us anything.”
In the event it was not an insurmountable problem. France Telecom was an IPO, and a large proportion of the shares were placed with local retail demand and fund managers. Telecom Italia’s secondary offering had a ready-made set of investors: “We knew that there was enough demand for the shares,” says Attolico. “Shares in the company were among the most widely distributed in Europe. Most fund managers had large holdings before the secondary offering and were keen for more.”
But this was not the only hitch. On Friday October 3, three days before bookbuilding was due to start, Taylor announced the sale of the businesses in BZW which had originated and were carrying out the deal – corporate finance and equity capital markets (see Orphaning BZW). At 7.30am, as Taylor was addressing the staff at BZW’s London headquarters, Kirwan-Taylor was flying over to Rome to join Attolico in reassuring the Italian treasury of the firm’s continued commitment. “They had three worries,” recalls Kirwan-Taylor. “Would the team stay together? Would Barclays stand behind the deal if anything went wrong? And were the staff committed, or distracted by what was happening internally?”
By Saturday, they had been joined by the whole BZW team: Jonathan Davie, the new chief executive of the businesses to be sold, Amir Eilon, Steve Harker (head of equities), and Taylor himself. “Our point was very simple,” says Kirwan-Taylor. “We’d been working on the deal for two years solid, and were determined to see it through. And to do the deal successfully was without doubt the best advertisement we could place in front of any potential bidders for the business.”
With that end of things covered, the team was quickly back to work. But a week later they were faced with the near-collapse of the Italian government. The hardline Communist Refoundation party refused to back prime minister Romano Prodi’s budget proposals, and he resigned. Being the first week of the bookbuilding process, it did scare some investors. “It’s not that they didn’t want to buy any of the new offering, just that they were wary of making any solid commitment in such uncertain circumstances,” says Attolico. The crisis passed on October 16, when Prodi finally secured the neo-communists’ backing .
A week later, another was blowing up. On Thursday 23 and Friday 24, as the deal was being priced, the Hong Kong stock exchange was experiencing the first jitters of its late-October crash. Some investors began to pull out of the Telecom Italia deal. Why agree to buy new shares at the Friday close stock price if by Monday the markets could be in free fall?
BZW’s team had nonetheless built up demand for $6.5 billion of the $11 billion offering, but retail demand was so strong that it ate into the institutional allocation. Over 1.5 million individuals had applied for at least the minimum 1,000 shares, nearly double the previous highest demand for an Italian share offering. The final allocation was 1,450 million shares worth $9.2 billion to retail and 280 million shares worth $1.8 billion (assuming greenshoe options of $1.5 billion are fully exercised) to institutions.
BZW may have missed out on bigger fees as a result, and the volatile market conditions may have made the shares harder to place, but this deal was certainly a triumph over adversity, and a good send-off for BZW.
