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| Best M&A deal |
| Novartis |
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Deal type: acquisition of Lek Amount: e876 million Date: October 2002 Advisers: Bank Austria (Novartis), ABN Amro (Lek) |
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Lek: its production capacity and |
Some of the biggest pharmaceutical companies have been exiting from the generics business but Novartis has made it clear that it intends to expand its share. The world’s second-biggest pharmaceuticals company believes that the patent explosion of the past five years is slowing, and that a good toehold in generics will help it to undercut rivals, particularly arch-rival GlaxoSmithKline (GSK), the biggest pharmaceuticals company.
One of GSK’s best-selling drugs is Augmentin, which is used to treat pneumonia and sinusitis. Revenues from this drug last year were around $2 billion. Novartis has been producing a generic version of the drug in Switzerland, but production capacity has been reached.
Slovenian company Lek made sense as an acquisition for Novartis for three reasons. It had the capacity to make lots of generics cheaply, it made its own generic version of Augmentin and of other big drugs made by Novartis’s rivals, and it gave Novartis a stronger presence in central and eastern European markets.
As Etienne Bottari, global head of chemicals and healthcare at ABN Amro, which advised Lek in the deal, says: “Lek was clearly a strong fit for Novartis in terms of geography and product. The company is renowned for its good manufacturing.”
Novartis approached Lek in July last year, and the companies agreed that there was synergy. Lek mandated ABN Amro to do the deal – ABN had been building up relationships with a few generics companies in the region in anticipation of consolidation – and Novartis mandated Bank Austria.
Willi Hemetsberger, a member of the managing board of Bank Austria, says: “The reason we could do the deal was we had a really good overview of the country. We could advise Novartis on how to alleviate the normal fears that arise when a foreign firm takes over a large domestic company in a country like Slovenia.” It’s a credit to both companies and their advisers that the deal was treated as broadly positive by the Slovenian press.
At the end of August 2002, Novartis came out with an offer of e800 million that already would have been the biggest M&A in Slovenia, and the biggest in the central and eastern European states for some years. However, at an AGM in late September, key Lek shareholders, particularly the three big government pension funds, rejected the bid. Novartis only won 42% of shareholder votes, when it needed at least 51%.
The government pension funds, which dominate demand on the Ljubljana stock exchange, have grown more active in recent acquisitions. A banker close to the deal says: “There has been a history in recent Slovenian deals where offers were made and the funds got seats at the deal table and managed to put up the price.” The funds in effect act as a block vote. As Guy Perricone, ABN Amro’s head of emerging markets, says: “It’s a very small market, so we have to assume these people were all talking to each other.” Their strategy paid off. In October Novartis made a new offer of Tr105,000 (e486) a share. This was accepted, and Novartis ended up buying over 99% of the deal for e876 million.
There were still complications to sort out. As Hemetsberger at Bank Austria says: “The exchange rate risk for buyer and seller turned out to be one of the more complicated aspects of the deal. At 8 o’clock on a Friday evening, the question came up: how do you convert e850 million into tolars without unbalancing the national exchange rate? I dealt with that sort of aspect of the deal. We spoke to the central bank and found a structure that worked.”
There could be a legal sting in the tail – in August 2002, as the Lek acquisition was going through, GSK filed a lawsuit in North Carolina against Novartis and several other generics producers, alleging “misappropriation of trade secrets, unfair trade practices and unjust enrichment”. GSK alleges that a strain of bacteria used to make Augmentin was stolen from its laboratories and used to make generics. The lawsuit is still under way. Novartis declined to comment on the case, or whether it will affect Lek’s generic version of the drug.
ABN Amro says that in part thanks to this deal, 2002 was one of the best years it ever had in M&A in CEE, and that its M&A team grew last year as a result.
The positive sentiment in the region as a whole, which this deal typifies, means that a lot of other investment banks have begun to turn their attention to the region, looking for the next big M&A deal. Perricone at ABN Amro says some of the big private equity funds have also returned to the region. This suggests that the competition for big deal mandates is going to be very tough.
| Highly commended |
| BIG Bank and BRE Bank’s pension funds |
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Type of deal: Merger Amount: Zl370 million (e83 million) Date: September 2002 Advisers: Citigroup (BIG Bank), BRE Bank |
Many an M&A deal has been kicked into the long grass by a regulator but it’s rare for a regulator to find himself at the striking end of the boot because of a deal. That is what happened in Poland in 2002, when a long-running struggle between mid-tier pension funds and the pension fund regulator finally led to the regulator being fired in a government reshuffle, and a deal going through – a good two years after it was first agreed.
After the Polish government liberalized the pensions industry in 1999, just about every bank, insurance company and financial institution in Poland – and many from outside – entered the market. “It was a free-for-all”, says one banker. However, the insurance companies that entered the market were a good deal savvier than the other market participants – in particular, they were better at aggressively marketing personal financial products.
Soon five big insurance company pension funds had established themselves as economically viable – among them Norwich Union, AIG and Commercial Union. The other 15 or so market participants were either struggling at around 300,000 customers – a level which was not quite viable – or way below even that level.
Many mid- to lower-tier pension funds were thus looking to consolidate or be sold. However, the pensions regulator, UNFE, presided over by Cezary Mech, declared that consolidation among mid-level pension funds would reduce the choice for customers and be anti-competitive. He let it be known that he was against such mergers – though he did allow funds right at the bottom of the market, which were obviously not viable, to merge.
Because banks could not sell their pension funds, and did not want simply to close them, they left them standing, but with minimal investment, minimal growth and slashed costs. Even these versions were losing the banks money, because under Polish law they had to put in capital on a quarterly basis.
BIG Bank, whose Ego pension fund had around 300,000 customers, finally decided enough was enough. As Jonathan Warburton, head of emerging markets, financial institutions, at Citigroup, which was mandated to arrange the deal, says: “The only viable option was to sell. BIG was putting lots of capital into a business that was not working.” He says: “We knew there were going to be regulatory problems but there was a growing feeling in the pensions industry that the regulator’s position needed to be and could be challenged.”
BRE Bank, which also had a pensions business in the mid tier, but which had ambitions to get into the top tier, was an interested buyer. The two banks, with BRE acting as its own adviser, decided to try to get past the obstacle of the prickly regulator by first effectively merging the two funds – mergers were allowed by Polish law. Then BIG Bank sold its shares in the merged entity to BRE Bank. They entered into the merger agreement in April 2001.
This way of doing things was a gamble. If the equity sale wasn’t approved, BIG Bank would be left with shares in a company it didn’t control, which would be even worse. BRE agreed to a price of Zl370 million (e83 million). It didn’t know when it would get what it paid for, or how the market would have changed in the meantime. As Warburton says: “BRE showed great willingness and trust to stand by the deal.”
It then appeared as if regulator Mech would not agree to the equity sale.
At that point, the banks could either go to the courts or embark on a big lobbying campaign. Warburton says: “No-one wanted a public battle with a regulator through the courts. We went for the latter course, so throughout 2001 there was a big lobbying campaign, targeting various members of parliament and the prime minister himself.”
Such a big campaign was needed because it was difficult to overrule the regulator’s decision. Industry regulators had been granted wide powers in order to keep them separate from the vicissitudes of politics but this made it hard to influence them, or remove them, if they were pursuing what seemed wrong-headed policies.
For the next 12 months, Citigroup’s team found itself in the unusual position of acting as a full-time political lobbyist. As the year went on, progress started to show. More speeches were being made in parliament against Mech’s stance, and he gradually became more isolated. Finally, prime minister Leszek Miller weighed in, and UNFE, the old pensions regulator, was abolished in March 2002, to be replaced with a new pensions and insurance regulator, KNUiFE, which was really just a new person, Jan Molkiewicz.
Molkiewicz approved the equity sale quickly, and finally, roughly two years after the banks first had the idea for the deal. It was completed in September 2002.
The deal secured a good price for BIG Bank, and managed to mitigate a rough year for it. It also raised the number of BRE Bank’s pension fund customers to around 500,000, making it the fifth biggest in the market, giving it a chance to compete with the top three. It has also opened up the pensions market for more consolidation. Already Zurich Re has sold its pension fund to Generali, which bought it in the expectation that it would be able to make further acquisitions.
Two other pension funds are also looking for buyers. These companies perhaps owe their rivals at BIG and BRE a drink at the next pensions conference for their skillful innovation. Above all, though, it was a triumph for market forces over heavy-handed regulators, and a story for M&A veterans to tell their grandchildren.
| Best equity deal |
| Wimm-Bill-Dann |
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Deal type: IPO Amount: $213 million Date: February 2002 Adviser: ING Barings |
The road to a New York listing for Russian dairy company Wimm-Bill-Dann had many twists and turns. The mandate was originally awarded in mid-2001 to UBS Warburg, with which Wimm-Bill-Dann had a long-standing relationship. UBS then looked to sign up Salomon Smith Barney to the syndicate for US distribution. SSB looked at the company and declined. That prompted UBS Warburg’s board, in October, to look closer at the IPO and demand that the bank also have nothing to do with the deal, much to the investment banking team’s chagrin.
UBS Warburg did not return calls to say why it wouldn’t undertake the IPO but it is not hard to see why the Russian company might be too controversial in the post-9/11 fear and loathing of anything hinting at questionable corporate governance. The company received early financial support from Trinity, a Russian conglomerate with interests in security, construction, engineering, financial services and casinos. Several Trinity managers are also Wimm-Bill-Dann board members.
The Wimm-Bill-Dann IPO prospectus says the Trinity group “has been the subject of speculation in the Russian press, including with respect to possible links with organized crime” but points out that “no charges have been brought by governmental authorities” and none has been threatened. But it does admit that a shareholder with a big stake, Gavriil Yushvayev, was jailed in the 1980s for violent crime.
Having been spurned by UBS and SSB, the company asked one of the co-managers of the original syndicate, ING Barings, if it would be lead manager. ING laid out a series of corporate governance conditions before it would take on the lead role – including the appointment of some non-executive directors it recommended (such as Mark Mobius, managing director at investment fund Templeton), and provisions that no shareholder would have a blocking vote on company policy.
It also recommended full disclosure of all shareholders in the company’s prospectus. Wimm-Bill-Dann met those conditions, so ING, once its own board had reviewed the decision, took on the deal.
Then about a month before the listing, UBS Warburg, according to ING, asked to come back on the deal, its own board recognizing that it had overreacted. ING refused to allow this.
The bank’s equity capital markets team was facing a tough challenge. This would be the first time a European company had listed on the New York Stock Exchange without a US bank in the syndicate. (Troika Dialog and Alfa Bank were the other syndicate members.) It would also be the first international IPO on the NYSE since September 11, and of a Russian company with an ex-convict as a major shareholder.
Yet when the IPO launched in February, the book was six and a half times oversubscribed – over $1 billion in demand – and the shares launched at $19.50.
Rory Scott, managing director of equity capital markets at ING Barings, says: “Investors were comfortable with the disclosures we made in the prospectus. Once they were, they looked at the investment itself, and they liked what they saw. The success of the deal was all down to the management – the CEO [David Iakobachvili] and CFO [Svetlana Ardentova] are both 33, and both extremely successful. They set up this company from a $50,000 loan in 1992, and they’re committed to it in the long term.”
The IPO was also helped by the attention of some dairy manufacturers, sniffing around for a way to enter the Russian market. Danone, for example, acquired a 3% stake at the launch. And many investors wanted to invest in a rare consumer stock from Russia. As one emerging market investor says: “Most of the internationally listed stocks from Russia are oil or telecoms. This was an opportunity to diversify.” Scott at ING points out that it was the first Russian retail stock to list internationally.
Considering the tough conditions, the IPO was a huge success. The share price later went as high as $31, and is still, almost a year later, trading only a little below issue price. The IPO raised $213 million for Wimm-Bill-Dann, enabling it to make three new acquisitions. Danone has since increased its stake in the company to 5%.
| Best sovereign bond issue |
| Romania |
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Deal size: e700 million Date: May 2002 Lead managers: Deutsche Bank, Citigroup, ING Barings, JPMorgan Chase |
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Good flows in Bucharest: confirmation of Romania’s |
Romania had an excellent year in the capital markets. It was the best-performing credit in JPMorgan’s emerging market global bond index, returning a yield of 21% compared with the index average of 8.7%.
This outperformance was partly thanks to names such as Hungary and Poland moving from emerging to more-or-less-emerged markets. That left the convergence funds, flush with cash, looking for countries to give them bigger yields. Romania, whose accession to the EU was still unclear at the start of the year, fitted the bill. A year and a half ago, its spreads were around 600 basis points over Euribor.
The move of large amounts of convergence money into a limited amount of Romanian bonds – Romania only had e1.05 billion outstanding – coincided with a year of positive news around the country.
A disagreement with the IMF over state employee salaries had clogged up the handing over of a $400 million loan. That was cleared up in August 2002. In November the country was granted membership of Nato. And at the Copenhagen summit in December it was offered the prospect of joining the EU by 2007, along with Bulgaria – a result that had been far from certain.
All this helped Romanian bond spreads tighten down by hundreds of basis points, and the country’s first 10-year bond, for e700 million, was launched in May in this climate. Led by Deutsche Bank, ING Barings, JPMorgan and Citigroup, the deal was promoted with a roadshow to Milan, Munich, Frankfurt and London, which was accompanied by Enache Jiru, minister for trade and public finances, and Christian Popa, deputy governor of the central bank.
Stuart Young, director of origination at Deutsche Bank, says: “This was a classic example of the convergence play. From day one, the deal was very over-subscribed, and we built a e2 billion book, made up of over 200 investors.” It was priced at 342bp over Euribor. Around 30% of the deal was placed with German convergence funds, 20% with UK accounts, 17% with Italy, and 10% with offshore US accounts.
Since launching, the deal has tightened yet further to around 265bp over swaps. Simon Quijano-Evans, senior analyst at HVB, says: “It’s impressive how far the 2012 spread levels have come down. If anything, the real value is now in the 2008.”
Although Romania deserves the prize simply for outperforming everyone else so dramatically, honourable mention should also go to Poland, which issued benchmarks in euros and dollars last year, as well as an interesting transaction in sterling. Bulgaria also deserves a mention for having done the first Brady exchange into euros – a deal one banker described as “the biggest I’ve ever worked on”.
| Best corporate bond deal |
| Gazprom |
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Deal size: $1 billion, in two deals Date: April and October 2002 Lead managers: CSFB, SSSB |
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Gazprom: its $1 billion dollar issue was |
Gazprom was facing a tricky debt situation in 2002, with 44% of its $15.6 billion of debt due to be repaid in a year. It needed a way to roll over its short-term debt to five-year debt since it only had $500 million in debt due to mature in 2007.
It considered its normal method of financing – syndicated loans – but almost all the loans it borrowed were secured on gas exports and it didn’t want to exhaust all its collateral. So the company needed to look to the bond markets for mid-term unsecured financing.
Lead managers CSFB and SSSB told Gazprom’s management that early 2002 was a good time to enter the bond markets since investors were looking beyond high-grade western European deals for yield pick-up. Gazprom was bound to attract investor interest. As one banker who worked on the deal says: “The one Russian company everyone knows is Gazprom.” Irackly Mtibelishvily, head of investment banking and corporate finance in Russia at Citigroup, says: “Gazprom has a very significant presence in the syndicated loan market but prior to this issue had never been to the bond markets, so it was an extremely important transaction.”
Gazprom’s first Eurobond issue would open it up to new investors. However, it was obvious that previous Russian corporate deals had tended to trade at a high premium to Russian sovereign deals. Sibneft’s 2007 bond, for example, traded at around 550 basis points over Euribor, compared with Russia’s 2007 bond, which traded at around 350bp over.
Because Gazprom was such a big and well-known company, with strong ties to the Russian government, the lead managers decided it should be pitched as a sovereign proxy, a strategy that was helped by Russia’s absence from the primary markets in 2002. The lead managers planned to do two bond deals – one at the beginning of the second quarter and another in the final quarter – and to involve the Russian finance ministry as closely as possible to emphasize the government support Gazprom enjoyed. Peter Malik, head of debt capital markets at CSFB, says: “Persuading the investors that Gazprom was a sovereign proxy was an accomplishment.”
The first deal, a $500 million five-year bond in April, was promoted with press releases pitching Gazprom as a semi-sovereign, as well as by a roadshow attended by deputy finance minister Sergei Kolotukhin.
The deal generated some $2 billion in orders, from about 180 accounts. About 30% was placed in the UK, 30% in US offshore accounts, and 10% in Switzerland. The bond was launched on April 25, with a spread of 9.125%. This was better than the finance ministry had expected and well below the government’s upper yield limit. As Gazprom CEO Alexei Miller, said: “We consider the issuance a big success. We had counted on a yield of 10.5% and received 9.125%. That says a lot.”
It was also, at 87.5 basis points over the sovereign, significantly tighter than other Russian corporates. As Mtibelishvily at Citigroup says: “No other Russian corporate issuer achieved such a tight spread over the sovereign yield to date.”
The plan was always to return for more funding later in the year. By October 2002, however, the market had taken a further turn for the worse, with WorldCom and other scandals casting doubts over corporate accounting, and the possibility of a socialist winning power in Brazil throwing investors into a blind panic. The second deal, therefore, did not fare quite as well as the first, coming in with a 10.5% coupon.
Bankers who worked on the deal say improvements in Gazprom’s transparency in the past year added to its appeal. The structure of the deal – a seven-year bond with a three-year put – also let Gazprom tap into two distinct pool of investors, and there was enough demand to increase the deal to $700 million from $500 million.
The deals are likely to be the first of many visits to the bond markets for Gazprom. As Mtibelishvily says: “The bond market will be a massive source of financing in the future for it.” It may, then, need to work out for certain what kind of government support it enjoys and is likely to enjoy, or it will face the sort of long-winded regulatory battle that Fannie Mae, Freddie Mac and Germany’s Landesbanken have endured.
Since that deal, Gazprom also launched a R500 million ($15.7 million) domestic bond with the longest maturity yet seen in the Russian corporate bond market, with a one-year put option. It has also mandated Morgan Stanley and Dresdner Kleinwort Wasserstein to issue a 10-year Eurobond this quarter, and has plans for a $2 billion secured loan later in the year, as well as raising $1 billion through syndicated loans.
| Best loan/corporate bond |
| TermoElectrica structured loan |
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Borrower: Termoelectrica, plus 18 separate Romanian power plants Deal arranger: JPMorgan Deal amount: $300 million Date of launch: December 2002 |
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Romanian power play: TermoElectrica’s bond-backed |
Here was the brief: Romania’s finance ministry wanted to fund both Termoelectrica, the state electricity generation company, and 18 separate power stations, through a $300 million loan. The deal, first discussed in October 2002, needed to be completed before the end of the year for budgetary reasons, which only gave three months to build it and come to market. And the finance ministry was only prepared to give its guarantee to a loan.
The bank that eventually won the mandate – JPMorgan – came up with an innovative structure that managed to steer a course through all these reefs and come to market successfully in December.
The structure devised by Florian Von Hartig, vice-president of emerging market origination, and Florin Vasilica, associate in the emerging market team, was a two-tier loan – $200 million to Termoelectrica, and $100 million to the 18 power plants, made up of smaller loans, some as small as $1 million, for each individual plant.
JPMorgan considered doing a plain vanilla loan, but that would have meant fixing an interest rate at the start of the deal process, which could take a few months. The bank believed that Romania would improve as a credit as the year went on, so it made sense to have a structure that could let Termoelectrica and the power plants cash in on that improving profile.
It decided to do this by launching a two-tier bond deal through JPMorgan Luxembourg, which repackaged the loans to bondholders. This enabled JPMorgan to set the price of the loans through the bond market – which opened the deal to a new pool of investors, and let JPMorgan price much later and quicker than it would a plain vanilla syndicated loan.
The first bond, for $200 million, transferred the credit risk of Termoelectrica, plus a guarantee from the ministry of finance, to bond holders. It was launched in early December, at a spread of 350bp over Libor. Von Hartig of JPMorgan believes this is “significantly better than what we could have achieved two months before.” He points out that since October, Romanian sovereign spreads had tightened in the run-up to the Copenhagen EU summit.
The second bond, for $100 million, also guaranteed by the finance ministry, repackaged the credit risk to the 18 power plants, and was launched in mid-December at 375 basis points over Libor. HVB was co-lead manager on the bond deals. The pricing of the loans were then fixed at these rates. The deal was rated BB- by Fitch and B+ by S&P.
Von Hartig says: “It shows how much Romania has grown this year and how familiar Romania is to investors that the deal could price at those levels.” The deals found good demand Europe-wide, with 30% being sold to US offshore investors.
The deal has won praise from competitors for its innovative structure. One head of corporate finance at a rival bank says: “It was the first of its type, a very interesting deal.” However, it is not clear whether more will follow. As Vasilica at JPMorgan says: “The structure responded to the one-off needs of the market.”
