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Advanced Finance 2006-2007 IPO-SOE

Advanced Finance 2006-2007 IPO-SOE. Professor André Farber Solvay Business School Université Libre de Bruxelles. Belgacom. IPO March 2004 # shares: 400m Secondary offering: 146.6m shares – including 10% overallotment option IPO technique: book-building

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Advanced Finance 2006-2007 IPO-SOE

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  1. Advanced Finance2006-2007IPO-SOE Professor André Farber Solvay Business School Université Libre de Bruxelles

  2. 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 Advanced Finance 2007 IPO/SOE

  3. 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 Advanced Finance 2007 IPO/SOE

  4. 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 IPO Initial Public Offering Advanced Finance 2007 IPO/SOE

  5. 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 Advanced Finance 2007 IPO/SOE

  6. 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 Advanced Finance 2007 IPO/SOE

  7. IPO-US Advanced Finance 2007 IPO/SOE

  8. IPO –US recent evolution Advanced Finance 2007 IPO/SOE

  9. Setting the Offering Price • Very difficult: • if price too high: unsuccessful • if price too low: loss for existing shareholders • In general: underpricing Advanced Finance 2007 IPO/SOE

  10. Advanced Finance 2007 IPO/SOE

  11. Average initial returns for 37 countriesSource: Loughran Ritter and Rydqvist "Initial Public Offerings: International Insights" Update January 23, 2001 Advanced Finance 2007 IPO/SOE

  12. 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 Advanced Finance 2007 IPO/SOE

  13. 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 Advanced Finance 2007 IPO/SOE

  14. Valuing a right: formula • Value of a right = Pcum - Pex • Mkt value of equity after SEO: V = nold Pcum+ nnewPsub • = (nold+nnew) Pex • Combine these to equations to get: • In example: value of right = 5/15 * (20-16) = 1.33 Advanced Finance 2007 IPO/SOE

  15. 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 Advanced Finance 2007 IPO/SOE

  16. 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 Advanced Finance 2007 IPO/SOE

  17. 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 Advanced Finance 2007 IPO/SOE

  18. 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 Advanced Finance 2007 IPO/SOE

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