Fortis share price
| Source: Reuters |
French conglomerate Suez had another busy month in the equity markets as it took advantage of a rally in the insurance sector to dispose of almost all its holdings in Fortis, the Belgian/Dutch bancassurer. The innovative disposal, managed by UBS, took the form of a combined mandatory exchangeable and block trade. It achieved a number of firsts and broke a number of records. The e1.19 billion three-year mandatory exchangeable into 75 million Fortis shares is the second largest mandatory exchangeable in Europe ever, after the Allianz/Miles deal in December 2000, also managed by UBS. It was fully underwritten at an issue price of e15.30 and offered a coupon of 4.5% and an exchange premium of 31%.
The mandatory was structured with two innovative features. It has a rare issuer call option that will allow Suez to force an early exchange if the Fortis share price goes above 120% of the exchange price, giving Suez the chance to benefit more if Fortis shares do well. Issuer call options are common on other equity-linked deals but not on mandatories.
The exchangeable also featured premium redemption, a first for a mandatory. Instead of redemption at 100% of par value, the issuer will receive only 90%, allowing it to save on coupon payments. The coupon pays gross dividends plus only 4.5%. Without the premium redemption feature the coupon would be expected to be as much as gross dividends plus 7% or even 8%.
The block trade of 50 million Fortis shares worth e750 million was accompanied by an additional placing of 56 million shares on behalf of hedge fund investors in the exchangeable. Hedge funds needed to sell about 80% of the underlying in order to hedge their delta exposure – the exchangeable’s price sensitivity to movements in the underlying stock price.
“We anticipated how much the hedge funds would want to hedge,” says Louise Wilson, head of equity syndicate at UBS, “and we thought that guaranteeing execution for them would be a good way to handle the placement and control supply of the stock afterwards.” The bookrunner’s efforts to manage the hedge funds’ sale of underlying shares to protect the share price is not common practice in Europe, according to rivals, but it is an effective technique.
The success of the full e1.58 billion block trade, completed before the market opened, was quite an achievement in view of the hammering that several block trades have received over the past few months and given its much larger size. The total 106 million shares were placed at e14.90, a 7.5% discount to the previous day’s close. Fortis shares closed at e14.95 on the day of the deal, April 24, down 7.26% from the previous close but up from the placement price.
The combined deal attracted healthy demand from 350 institutional investors, with hedge funds playing a central role. Most of the exchangeable and about half the total block trade went to hedge funds, with conventional investors taking the other half. UK investors bought most, taking 51% of the shares and 52% of the exchangeable. European buyers featured strongly in the share allocation and US investors in the exchangeable.
Mandatory exchangeables in Europe are about as common as ketchup and freedom fries in a French restaurant. However, the structure well suited Suez’s needs. The mandatory helped it to pull out of Fortis and the finance sector, to raise capital, and cut debt by e1.8 billion. It also gives downside protection and some upside exposure.
Proceeds from the deals matched the value of the Fortis stake on Suez’s books so that it was able to exit without a loss. This was a much better deal for the company than its e400 million March fire sales of holdings in Axa, TotalFinaElf, and Vinci. These sales, which had been done as block trades by Morgan Stanley, Citigroup, and UBS at the end of February were successful but done at historically low prices.
The timing of the deal was crucial. It had to be done quickly because the market expected Suez to attempt a sale of Fortis and because Suez wanted to lock in the gains in Fortis’s share price, which has almost doubled since early March. It approached at least three banks, including UBS, JPMorgan, and Citigroup, just after the market close at 17:30 the day before the trade. UBS didn’t get the go-ahead until well after midnight.
The unwashed and unshaven bankers hit the phones and sold the block in under an hour. But the mandatory, with its complicated structure and unique features, took longer – about twice as long as an ordinary convertible according to sources on the deal. The book opened at about 07:30, closed at 10:30 and by 12:00 everything was wrapped up. A lot was at stake for UBS. With nearly e2 billion of capital committed, the deal was the largest bought deal in three years.
The sale left Suez with just 1.5% of Fortis, helping to complete a transformation from a primarily financial services group to a utility and industrial conglomerate that began with the sale of Banque Indosuez to Crédit Agricole in 1996. It also rescued Suez from S&P’s negative CreditWatch list and confirmed its A- rating.
