The dust has barely had time to settle on France Télécom’s IPO of Orange. And yet it has already earned its place in the history books as one of the most significant deals of 2001.
It has set a troubling precedent for all those telecom companies that were desperately hoping to turn to the equity markets to raise funding and reduce their leverage. As the Orange price fell even after the lead banks had reduced the indicative offer price, anxious chief executives at telecom companies were asking their finance directors to somehow produce a refinancing plan B.
This was a deal that flopped and that hurt. That’s evident from the blatant attempts of those involved to pass the buck in the days that followed the IPO on February 13. Rather than concentrating on exactly what went wrong with the deal, most are busy pinning the blame on each other. Investors are berating the bankers for failing to do their jobs properly and set a ceiling on the issue price. They are also accusing France Télécom of greed for trying to squeeze too much out of them.
Bankers, meanwhile, complain that investors are becoming too risk-averse in refusing to buy shares based on multiples of EBITDA in 2004. And, naturally, all of them are blaming market volatility.
It became clear that the Orange flotation would be a troubled and market-testing deal early in February, soon after France Télécom approached the markets with a price range of e11.50 to e13 for Orange, valuing it at between e55 billion and e65 billion. “We believed, and all the pre-marketing feedback we were getting confirmed to us, that people seemed prepared to pay for future growth. So we based the initial valuation on EBITDA in 2003 and 2004,” says Robin Osmond, head of European equity syndication at Morgan Stanley Dean Witter, one of the three global coordinators. The other lead banks were Dresdner Kleinwort Wasserstein, which has a long-standing relationship with Orange, having advised on its acquisition by Mannesmann and subsequent sale to France Télécom, and French bank Société Générale. “On that basis it represented good value [relative] to Vodafone,” Osmond continues.
Over the next 10 days, however, things turned very ugly indeed in the markets. A constant stream of bad news during the book-building period sent telecom prices hurtling southwards. “Orange got caught in a downward spiral,” says Andrew Moffat, head of syndicate at WestLB Panmure. “It was priced off comparables so when competitor share prices fell, Orange started to look overpriced.”
Institutional investors reacted by telling the banks that they weren’t prepared to buy the shares at a price in the current range. What’s more, it was becoming clear that retail investors weren’t interested in owning Orange stock either. Despite a discount of e0.50 a share and an extensive advertising campaign, demand was low. The French public were particularly wary, partly because Orange is a little-known name in France and also because they’d got their fingers burnt over France Télécom’s flotation of Wanadoo, its internet portal, last summer.
The banks had little choice but to advise France Télécom that the price should be cut. “We knew we were making a tough recommendation,” admits Osmond. “France Télécom was disappointed and frustrated, but it is also a sophisticated and pragmatic company.” The revised price range of e9.50 to e11, based on 2003 EBITDA multiples, valued Orange at a 13% discount to Vodafone at the midpoint. It seemed to be working. Then, four days before the issue was due to price, the lead banks announced that it was two-and-a-half times oversubscribed. To the uninitiated that might sound like a success. But to veterans of the equity capital markets, used to successful deals being vastly oversubscribed, it sounded no better than touch and go. Bankers away from the deal described the level of oversubscription as disappointing.
“We left the actual pricing until as late as possible,” says Andrew Edmond, global co-head of equity capital markets at DrKW, “so we could take into account the last day’s trading before Orange launched.” Following a relatively positive day for the sector and Vodafone in particular, which closed up e0.13, on February 12, Orange priced at e10 and started trading on the Paris Bourse at 2pm on February 13. Almost immediately, a frenzy of trading activity pushed the stock down below the institutional offering price. Retail investors were in the money for a while but continued trading pushed the price down further still. The shares closed at e9.40, giving Orange a market cap of e45.2 billion. The next day they closed down even further, at e8.82.
Observers were quick to criticize France Télécom and its advisers for pricing Orange at the wrong level. “If you go above the bottom of the range in difficult market conditions, you’re saying that you think demand is strong enough to justify that,” says Moffat at WestLB. They also questioned the wisdom of France Télécom’s issuing a bond exchangeable into Orange shares at the same time as the IPO. Equity-linked bonds are often bought by hedge funds, which go long on the bond and short on the equity. “I have no doubt that investors who bought the equity are paying for the fact that there was a bond issue,” says one banker.
Above all, investors feel aggrieved that France Télécom pushed them too far in difficult markets. “If Orange had priced at e9.50 or even e9.75 it would be trading at e10 now,” says one. “People saw that France Télécom absolutely had to have the money and that put them off.” “I’m really mad at the bankers,” says another. “It’s their role to strike the right balance and they haven’t done that. They’ve snapped under the pressure.”
Unsurprisingly, the bankers have a somewhat different perspective. “Institutional investors have become very conservative,” says Osmond at MSDW. “They’re not willing to pay for growth beyond 2001 or 2002 and this is where we believe a significant part of Orange’s value comes from.” Jean-Francois Tiné, managing director in equity capital markets at SG, says: “Orange is cheap compared to its peers. Of course we’re not happy that it fell below the issue price, but these are tough and challenging markets and we got the deal done.”
But at what price? In the words of one fund manager: “By the end, Orange looked like damaged goods.”
