Transcript Global PowerPoint Template (Title Master

Capital Markets Case Study
20 March 2008
Eugene Belin
Managing Director, Head of FICC, Citi Russia, CIS and Israel
Who are we?
What We Do
MONEY
Issuers /
Borrowers
Corporations
Corporate &
Investment Bank
Investors
Branded Consumer
and Retail
Banks
Energy + Power
Governments/
Sovereigns
Banks
Hedge Funds
Forest Products +
Chemicals
Healthcare +
Pharmaceuticals
Capital
Markets
Sales +
Trading
Industrials + Capital
Goods
Insurance Companies
Mutual Funds
Pension Funds
Real Estate
Individual (Retail)
Telecom + Media
Money Market Funds
Financial Institutions
Financial Sponsors
Relationship
Bankers with
an Industry
Focus
Bankers
with a Market /
Product Focus
Primary +
Secondary
Market
Activity
Capital Raising Options
Capital Markets
Fixed Income
Loans
Commercial
Paper
Low Risk
Equities
Bonds
Equity
Linked
Equity
Equity
Derivatives
High Risk
KPN: Interactive Case Study
Introduction to KPN
o Koninklijke (Royal) KPN NV (“KPN”) is a Dutch telecoms
company, formerly the Dutch state-owned monopoly
o Core activities include:
– Fixed-line services in the Netherlands
– Mobile services in the Netherlands, Germany and Belgium
o KPN is listed on the Amsterdam, New York, London and
Frankfurt stock exchanges
o KPN has had an eventful history
– Privatisation
– Deregulation
– Purchase of 3G licences
– Rating downgrade
7
May 2000
o KPN’s objectives:
– Refinance “bridge facility” arranged for the acquisition of
German mobile operator E-plus
– Secure medium-term financing for upcoming 3G
auctions


Positive credit
sentiment due to boom
time
Increased “liquidity”
levels in the market
High M&A activity (and
hence acquisition
financings) meant
increased loan volumes

Share Price: €47-60

Bond Price: €89-91

Credit Ratings: Aa2/AA

Loan Price: Libor+3537.5bps
Bonds
Loans

KPN Market data:
Equity

Markets hard hit after
“bubble” bursts investors nervous

Investor uncertainty
following market decline
from March 2000 highs.

Deluge of telecom
supply expected after
licence auctions

Strong telecom equity
pipeline
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to May 00
€ 80
110%
€ 70
100%
90%
€ 50
€ 40
80%
€ 30
70%
€ 20
60%
€ 10
€0
Jan-99
Mar-99
May-99
Jul-99
Share Price
Sep-99
Nov-99
Jan-00
KPN 4.75% Nov-08 Bond Price
Mar-00
50%
May-00
Bond Price (%)
Share Price (€)
€ 60
BONDS
Result?
o The Company announced a jumbo multi-tranche short-dated Eurobond
financing through Citi:
€1bn FRN
due Jun 01
$1bn FRN
due Jun 01
€2.5bn FRN
due Jun 02
Press Comments
Key Features / Terms
Issuer
Offer Size
Market
KPN NV
Maturities
1, 2 and 3 years
Marketing
3 day European roadshow
Bookbuild
All “pot”
No. investors
Citi Role

€6.0bn equivalent
Multi-tranche Eurobond
140
Joint Bookrunner
€1.5bn 5.575%
due Jun 03
“KPN eases telecom fears
in short-dated €6bn raid”
Euroweek

“That’s the way to do
it……KPN last week
answered the big question
– whether telecoms
borrowers can access the
fixed-income sector – with
a resounding YES.” IFR
July 2000
o KPN’s objectives:
– Reduction of debt level having
secured financing ahead of 3G
auctions
Loans
 Continued high
liquidity in the market
and positive credit
sentiment due to
boom time
Bonds
 Corporate bond
supply increases,
requiring issuers to
pay higher and
higher yield
 Govt. spreads widen
as USTs outperform
11
KPN Market data:

Share Price: €38-44

Bond Price: €89-90

Credit Ratings: A3/A-

Loan Price: Libor+3537.5bps
Equity
 Continued decline
from March 2000
highs, however
appetite for telecom
equity still exists as
investors hope for
recovery
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Jul 00
€ 80
110%
€ 70
100%
90%
€ 50
€ 40
80%
€ 30
70%
€ 20
60%
€ 10
€0
Jan-99
Mar-99
May-99
Jul-99
Share Price
Sep-99
Nov-99
Jan-00
Mar-00
KPN 4.75% Nov-08 Bond Price
May-00
50%
Jul-00
Bond Price (%)
Share Price (€)
€ 60
EQUITY
Result?
o Announcement on 17th July 2000 that the Company would launch a
“substantial” equity offering in Q4 2000
o €5.5bn combined equity and equity-linked offering launched via Citi on 16th
October 2000
Equity
Equity-Linked
Offer Size
€4.0bn
€1.5bn
Offer Type
Fully marketed Equity Offering
“Subordinated” “Convertible” Bond
€17 following bookbuild (2.4% discount
to market)
5 year maturity, 3.5% coupon, 26%
conversion premium
1.8x
11.3x
Joint Global Co-ordinator and
Bookrunner
Joint Global Co-ordinator and
Bookrunner
Pricing
Oversubscription
Citi Role
September 2001
o KPN’s objectives:
– Obtain short term financing
Loans
 Slowdown in economy
raises credit concerns
 Lower loan volumes
compared to 2000
 Low appetite for
telecom names
KPN Market data:
Bonds
 In secondary market
investors rebalance
portfolios away from
volatile equities and
towards cheap bonds
 But in primary market
the high yields are
unattractive to issuers

Share Price: €3

Bond Price: €71-72

Credit Ratings: Baa2/BBB+

Loan Price: Libor+200bps
Equity
 Share price at historic
lows. Sentiment weak
towards telecom stocks.
 Uncertainty over timing
of economic recovery
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Sep 01
€ 80
110%
€ 70
100%
90%
€ 50
€ 40
80%
€ 30
70%
€ 20
60%
€ 10
€0
Jan-99 Apr-99 Jul-99
50%
Oct-99 Jan-00 Apr-00 Jul-00
Share Price
Oct-00 Jan-01 Apr-01 Jul-01
KPN 4.75% Nov-08 Bond Price
Bond Price (%)
Share Price (€)
€ 60
LOAN
Result?
o September 2001: €2.5 bn underwritten liquidity facility provided by Citi together
with 7 banks
o Facility had higher pricing and tighter credit protections
Key Results
Bond Spreads
Stock Price
Tightened from over 1000 bps to approximately 400 bps. Current spreads
are 50 bps
Up by 20% in one day and 65% since its lowest value in 2002
Ratings
Upgrade with stable outlook to BBB+/Baa1
Terms &
Conditions
Tighter credit protection and higher pricing
November 2001
o KPN’s objectives:
– Debt reduction
– Avoidance of “fire-sale” of assets
– Funding growth
Loans
 Slowdown in economy
raised credit concerns
 Lower loan volumes
compared to 2000
 Low appetite for
telecom names
Bonds
 Corporate market
rebounded after Sep
11 activity.
 Volatile equity
market drives
investors towards
fixed income.
KPN Market data:

Share Price: €4-6

Bond Price: €72-85

Credit Ratings: Baa2/BBB-

Loan Price: Libor+200bps
Equity
 Volatile markets due
to uncertainty on
economic recovery
 Interest rate driven
market
 Defensive nature of
fixed line telecom
stocks attractive
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Nov 01
€ 80
110%
€ 70
100%
90%
€ 50
€ 40
80%
€ 30
70%
€ 20
60%
€ 10
€0
Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01
Share Price
KPN 4.75% Nov-08 Bond Price
50%
Bond Price (%)
Share Price (€)
€ 60
EQUITY
Result?
o KPN announced a €5.0bn equity offering on 21st November 2001 via Citi.
Offering Summary
Offer Size
€5.0bn
Fully marketed Equity Offering
Offer Type
Existing shareholders given preferential allocation
Fully underwritten
Pricing
% of Enlarged Co
€4.90 – 18.6% discount to pre-announcement price
44%
Bookbuilding Period
22nd November to 6th December
Take up by Existing
Shareholders
75%
Citi Role
Joint Lead Manager
KPN Share Price (€)
Stock Price
Performance
18 September 2003
7.5
Performance Since 12-Mar
7.0
KPN:
21%
6.5
Sector:
30%
6.0
Market:
36%
5.5
5.0
01-Jan 01-Feb 01-Mar 01-Apr 01-May 01-Jun 01-Jul 01-Aug 01-Sep
Government Objectives
Raise finance from non-core stakes
Achieve maximum price for them
Quick, efficient process
KPN price on 18-Sep: €6.75
KPN Objectives
Remove overhang
Minimum impact on share price
Quick, efficient process
Competitive auction of a block of shares (“Block trade”)
Block-Trade Exercise
Student Hand-out
Parameters of the Auction
Number of shares
being sold
Reference price per
share
Indicative auction
value
300 million
€6.75
€2,025 million
Teams
Process
Considerations
Split into teams of 5/6
Teams will bid against each other to win the auction
Explanation of factors to consider
Views from key decision-makers in the process
Deliberation
15 minutes for your team to decide what price to bid
Submit price in € per share in sealed envelope
Winner!
(or are they?)
Whichever team bids the highest price per share will win
But, what price were the shares sold to investors at on Friday?
Cash prize if a team can win the auction at a price that the
shares can be sold at
Goal is to win the auction, but not lose money!!!
Risk – Reward Considerations
o Key measure to consider in deciding what price to bid at is the percentage discount to the
reference price (left hand column of table)
o The amount of money the firm makes will depend on what price the shares are sold at the
next day (matrix table)
Profit & Loss
Profit
/ loss
Profit
/ loss
Price
shares
areare
sold
at the
next
dayday
- Discount
to reference
price
Price
shares
sold
at the
next
- Discount
to reference
price
0% 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 5% 6% 6% 7% 7% 8% 8% 9% 9% 10%10%
Discount
Bid Bid
price
€ 6.35
€ 6.28
€ 6.21
€ 6.14
€ 6.08
Discount
price€ 6.75
€ 6.75€ 6.68
€ 6.68€ 6.62
€ 6.62€ 6.55
€ 6.55€ 6.48
€ 6.48€ 6.41
€ 6.41
€ 6.35
€ 6.28
€ 6.21
€ 6.14
€ 6.08
0% 0% € 6.75
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
-€182m
-€203m
€ 6.75 €0m€0m
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
-€182m
-€203m
1% 1% € 6.68
-€20m
-€41m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
-€182m
€ 6.68€20m
€20m €0m€0m
-€20m
-€41m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
-€182m
2% 2% € 6.62
-€20m
-€41m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
€ 6.62€40m
€40m€20m
€20m €0m€0m
-€20m
-€41m
-€61m
-€81m
-€101m
-€122m
-€142m
-€162m
3% 3% € 6.55
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
-€142m
€ 6.55€61m
€61m€41m
€41m€20m
€20m €0m€0m
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
-€142m
4% 4% € 6.48
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
€ 6.48€81m
€81m€61m
€61m€41m
€41m€20m
€20m €0m€0m
-€20m
-€40m
-€61m
-€81m
-€101m
-€122m
5% 5% € 6.41
€101m
-€20m
-€40m
-€61m
-€81m
-€101m
€ 6.41
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
-€20m
-€40m
-€61m
-€81m
-€101m
€ 6.35
€122m
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
-€20m
-€40m
-€61m
-€81m
6% 6% € 6.35
€122m
€101m
-€20m
-€40m
-€61m
-€81m
€ 6.28
€142m
€122m
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
-€20m
-€40m
-€61m
7% 7% € 6.28
€142m
€122m
€101m
-€20m
-€40m
-€61m
€ 6.21
€162m
€142m
€122m
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
-€20m
-€40m
8% 8% € 6.21
€162m
€142m
€122m
€101m
-€20m
-€40m
€ 6.14
€182m
€162m
€142m
€122m
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
-€20m
9% 9% € 6.14
€182m
€162m
€142m
€122m
€101m
-€20m
€ 6.08
€203m
€182m
€162m
€142m
€122m
€101m€81m
€81m€61m
€61m€40m
€40m€20m
€20m €0m€0m
10%10% € 6.08
€203m
€182m
€162m
€142m
€122m
€101m
Bid Prices
Share Price Performance
o KPN’s share price has increased c.20% since March
o But, it has underperformed the sector by c.15% for most of the year. One concern of investors
has been the overhang, i.e. the potential impact on the share price of the Dutch State selling
their 31% shareholding in KPN
o This auction of 40% of the Dutch State’s shareholding, will reduce these concerns and is likely
to have a positive impact on the share price
10%
underperformance
KPN Share Price
€7.50
€7.00
€6.50
€6.00
€5.50
€5.00
12Mar
KPN
26Mar
09Apr
23Apr
07May
21May
04Jun
European Telecoms Sector (rebased)
18Jun
02Jul
16Jul
30Jul
13Aug
27Aug
10Sep
General Block Trade Information
Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03
o Block trades are typically executed at a
discount of between 0% and 10%, but
this is not a rule
0%
Discount to Pre-Announcement
-1%
-2%
-1.6%
-3%
-2.8%
-2.9%
-4%
-3.6%
-4.1%
-4.2%
-4.4%
-5%
-5.0%
-5.0%
o Recently, as block issuance has
increased, banks have become more
competitive
– Tighter discount needed to win a
bid
-6%
-6.1%
Average: -4.3%
-7%
-7.0%
-8%
o An important consideration for pricing is the average daily trading volume (ADTV) multiple – the
number of normal days’ trading volume represented
– If a stock has an average of 1m shares traded per day, a 5m share block would have a
multiple of 5x
o Large block relative to ADTV implies big market impact – larger discount
o At 26x ADTV multiple, KPN block is larger than average
Precedent Auctions
Approx. Size
Percentage of KPN
Multiple of Average
Daily Traded Volume
€2.0bn / $2.3bn
12.0%
26x
Size
% of
Company
Multiple of
Daily Volume
Discount
Vodafone
$5.1bn
1.6%
2.5x
5.6%
Yes
Vivendi Universal
$2.9bn
6.5%
12.5x
5.3%
No
Vodafone
$1.2bn
0.6%
1.1x
1.5%
Yes
Diageo
$1.1bn
3.9%
8.3x
7.8%
Yes
Telenor
$1.0bn
13.9%
88.1x
6.1%
Neutral
Company
Did the Bank
Make Money?
View of Independent Equity Research Analysts
Recommendation
12 month
Target Price
Buy
€7.40
“KPN offers investors a well-run company that
is undervalued. In our view, there are few
barriers to [share price] outperformance in the
short term”
Bank “M”
Buy
€8.00
“We see KPN as having a strong management
team, good earnings momentum, a sound
financial position and a very attractive valuation”
Bank “C”
Neutral
€7.10
“Results once again ahead of expectations.
However, concerns about domestic competition
and issues with German operations. Following
recent recovery in share price, we downgrade
our rating to neutral”
Bank “D”
Sell
€5.00
“We have fundamental concerns about KPN for
three reasons; we believe the quality of the
assets is below that of the peer group, KPN
faces above average broadband competition,
cash flow is worse than the sector”
Research House
Views
75% of research analysts have a “Buy” rating on the shares
Advice From the Citi Team
Equity Capital Markets
Sales / Research
“We want to win this deal. It is a very
prestigious transaction”
“This is a great stock which we have
been recommending our clients to buy”
“Winning is very important to our
franchise, league table position and
budget”
“The share price has underperformed
its peers in part due to the worry about
this placing. We think the shares will
rise after this transaction”
“It is going to be a very competitive
process and we need to bid
aggressively”
Senior Management
Trading
“We are the #1 trader of the shares, we
know it very well. There are a number
of fund managers that want to buy a lot
more stock”
“Demand at the right price will not be a
problem”
“OK, this is a big deal and we want to
win”
“However, it is only one deal and should
not bet the firm on it”
“We should bid to win, but also not to
lose money”
What to Do Next
o The clock is ticking... 15 minutes to decide on a price in € per share to bid
o Write team name and the price per share on a piece of paper and then hand in
o Only a team which wins the auction and does not lose the firm money will get the cash
prize!
Good luck...
The Next Day...
What Happened Next...
07:00
07:30
08:15
09:30
09:45
Citi briefs
salesforce
Order book
opens
Demand
received for
half the deal
Demand equals
deal size
Shares at €6.83
Transaction
closed, demand
for €2.6bn
Transaction
priced at €6.78
6.85
6.85
450
450
400
400
350
350
Demand (m shares)
Demand (m shares)
KPN Share Price (€)
KPN Share Price (€)
6.80
6.80
300
300
6.75
6.75
6.70
6.70
250
250
200
200
150
150
6.65
6.65
100
100
5050
6.60
6.60
07:00 07:15
07:15 07:30
07:30 07:45
07:45 08.00
08.00 08.15
08.15 08.30
08.30 08.45
08.45 09.00
09.00 09.15
09.15 09.30
09.30 09.45
09.45
07:00
Demand
KPN
price
Demand
target
Demand
KPN
price
Demand
target
0 0
Independent Views on the Transaction
“If European ECM bankers needed any further
indication that sizeable deals are possible in today’s
markets, given good knowledge of the stock and
confidence in one’s own distribution ability, they needed
to look no further than the ground-breaking display from
Citi on Friday morning”
“The deal provides a shot of confidence for European
telecoms investors who have sat beneath government
share overhangs for years. It demonstrates that a
strong appetite remains for telecoms shares”
Lex, Financial Times, 19 September 2003
International Financing Review, 20 September 2003
“Rivals described it as the most aggressive deal they had
ever seen”
Financial News, 29 September 2003
“The offering was extremely well executed by Citi”
Financial News, 29 September 2003
“The deal has finally come after months of rumours,
but the manner in which it arrived still took the market
by surprise”
International Financing Review, 20 September 2003
“The block trade, arranged by Citi, will reduce the
threat of an overhang that has depressed KPN's share
price in recent weeks”
Financial Times, 20 September 2003
Independent press reports acknowledged the resounding
success of the transaction
QUESTIONS