France Telecom’s share price
| Source: Reuters |
A massive, well-flagged, marketed rights issue for a heavily indebted European telco during a war is by no means a sure-fire deal. So France Telecom’s success in selling an astonishing e16 billion-worth is remarkable. The credit arguably belongs more to France Telecom than to any of the 21 underwriting banks. In a first for the equity capital markets, the issuer created a bidding process for the underwriting. At about 8pm on Friday, April 21, France Telecom asked 24 banks to indicate how much they would be willing to underwrite at a price of between e13 and e16, effectively building its own book.
Advised on the bidding process by Commerzbank, France Telecom structured the fees to encourage banks to bid aggressively. Bidders allocated more than e1 billion received 2.5%, banks that bid more than e1 billion but were allocated less got 2.25%, while banks that bid less than e1 billion got only 2%. The eight global coordinators got an additional 12.5 basis points and an 80bp success fee – half if the deal went well and half if the bank successfully distributed its rights.
Less than 24 hours later, France Telecom had secured more than e30 billion of underwriting guarantees from 21 banks.
France Telecom worked closely with the bookrunners – ABN Amro Rothschild, Goldman Sachs and BNP Paribas – in structuring the deal and appointed eight global coordinators to head syndication. The coordinators, each underwriting e500 million, were the bookrunners and Crédit Agricole Indosuez Lazard, Crédit Lyonnais, Deutsche Bank, Morgan Stanley, and Merrill Lynch.
Bankers on the deal were impressed by the corporate’s skills. “I’d never come across such a compressed process for this type of deal,” says Jeroen Berns, managing director, equity capital markets, at ABN Amro Rothschild. “We knew next to nothing on Friday but by Monday everything was sorted. We worked the whole Sunday flat out for 24 hours.”
According to Michel Combes, finance director of France Telecom, the bidding process caught some of the banks off guard. “It had never been done before but it’s something that’s quite common in other industries.”
Not all the banks were so thrilled about the fiercely competitive bidding process, with some unhappy with the way it put the issuer in charge instead of the banks, and compressed fees. Which was of course the point.
The rights issue is part of France Telecom’s “15 plus 15 plus 15” plan, announced last December to improve its capital base. Before it approached the equity market it negotiated a e5 billion credit facility in February and tapped the bond market for about e9 billion over December, January, and February.
Because the need to raise equity had been clearly signalled by chairman Thierry Breton, the company also knew that it had little to lose by marketing the deal. It had pleasantly surprised investors a few weeks before launch with annual results showing a better than expected reduction of its e64 billion debt and better than expected earnings.
The fully underwritten e15 billion rights issue priced on March 24 at e14.50, an exceptionally tight 28% discount to the previous Friday’s close. Tight pricing was important to the issuer because it wanted to emphasize that it was not a rescue issue. The offer comprised a free distribution to shareholders of one warrant for every share held that could be used to buy 19 new shares for every 20 warrants exercised. The warrants were priced at a tight 18% discount to the theoretical ex-rights price (Terp) – the gap between the subscription price and the new price the shares are expected to trade at.
Investors subscribed to 94% of the warrants and the remaining 69.6 million shares were placed through an accelerated bookbuild on April 8 at e19 a share, raising e1.36 billion. Investors who were unable to exercise their warrants snapped up the rump, despite confusion over the expected size of the placement. The bookrunners had earlier calculated that the rump would be just 40 million shares.
The share price held up very well, slipping just 1% on the day of launch. Demand was helped by e9 billion of state support.
