Corporate Financial Policy 2004-2005 IPO-SOE

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Corporate Financial Policy2004-2005IPO-SOE

• Professor André Farber
• Solvay Business School
• Université Libre de Bruxelles

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Belgacom

• IPO March 2004
• shares 400m
• Secondary offering 146.6m shares including 10
  overallotment option
• IPO technique book-building
• Price range 23.0 to 26.5 per share
• Final price 24.50
• Market cap 9.8 billion
• First trading 5 in downmarket
• Stock price May 2, 2005 29.43

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• IPO August 2004
• shares 270m
• Primary and secondary offering
• Dutch auction
• Initial plan 24.6m shares offered at 108-135
  (Mkt cap up to 36m)
• Final offer 19.6m shares offered at 85-95
• Offer price 85
• First day close 100.34 (18.5)
• Stock price May 2, 2005 222.25

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IPO Initial Public Offering

• Why go public?
• Mobility of capital
• Realize capital gain
• Liquidity for minority shareholders
• Tranfer of control
• Stock options
• Access new sources of funds
• Future equity offering
• Equity linked
• Increase visibility

• Costs of going public
• Direct costs
• spread (investment bank)
• direct expenses
• underpricing
• Loss of confidentiality

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How to proceed?

• Choose investment bank (competitive offer or
  negotiated offer)
• Advice (key role of reputation)
• Underwrite
• Placement
• Choose market
• Prepare prospectus
• Approval by market authorities
• Placement
• book building vs fixed price
• greenshoe option to place additional shares

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IPO - Belgium

• 1984-1995 1996-1999
• Number 39 70
• Average age of company 41.5 17.6
• Average proceed m 108 60
• Average return day 1 9.38 15.25
• Source KBC Introductions en Bourse Courrier
  Economique et Financier 14 janvier 2000

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IPO-US
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IPO US recent evolution
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Setting the Offering Price

• Very difficult
• if price too high unsuccessful
• if price too low loss for existing shareholders
• In general underpricing

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Average initial returns for 37 countriesSource
Loughran Ritter and Rydqvist "Initial Public
Offerings International Insights" Update January
23, 2001
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SOE Seasoned Equity Offering

• General Cash Offering
• Firm commitment investment bank underwrites
  securities
• Best efforts investment bank acts as placing
  agent
• Right issue (Europe)
• Example Lafarge launches rights issue to fund UK
  buy
• Lafarge, the French building materials group,
  will today launch a 1.1 bn one-for-eight rights
  issue to part-finance the acquisition of Blue
  Circle Industries, the UK cement manufacturer.
• The new shares will be priced at 80 each, a
  discount of 18 per cent to the Lafarge share
  price, which fell 1.60 to 98.05 yesterday. The
  issue is being lead managed by BNP Paribas, joint
  financial advisers to Lafarge on the bid.
• Financial Time 12 January 2001

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Valuing a right example

• Initial position
• Number of shares outstanding 10 m (nold)
• Price per share 20 (Pcum)
• Terms of offer
• Number of new shares issued 5 m (nnew)
• Subscription price 16 (Psub)
• Number of rights for a share 2
• After offer
• Number of shares 15 m
• Value of shares 280 m
• Price per share 18.67 (Pex)
• Value of a right 1.33

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Valuing a right formula

• Value of a right Pcum - Pex
• Mkt value of equity after SEO V nold Pcum
  nnewPsub
• (noldnnew) Pex
• Combine these to equations to get
• In example value of right 5/15 (20-16) 1.33

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Does the subscription price matter?

• Back to example Proceed of issue 80m
• Subscription price 16 8
• Number new shares 5 m 10 m
• rights / share 2 1
• Value of right 1.33 6
• Price per share after issue 18.67 14
• Total cost of 1 new share 18.67 14
• 16 2 1.33 8 1 6
• Old shareholder
• Before 20 20
• After 20 20
• 18.67 1.33 14 6

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In practice

• Subscription price set before start of offering
• Offering valid for a few days (2 weeks)
• Rights similar to American warrants
• right to buy new share at fixed price
• if exercised, number of share outstanding vary
• From option pricing theory
• value of right function of volatility
• exercise as late as possible

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Event studies

• How to measure the impact of some piece of
  information on the stock price? Event studies
• Part of Efficient Market Hypothesis
• Methodology
• (1) Sample of announcements of same type
• (2) Calculate abnormal returns around
  announcement date Abnormal return Realized
  return - Expect Return
• (3) Statistical test

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Stock Market Response to SEO

• Sample size 2-Day Announcement Return
• Security sold
• Common Stocks 262 -1.6
• Preferred stock 102 0.1
• Source Smith, C.W. Raising Capital Theory and
  Evidence