Capital Markets Case Study20 March 2008Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel
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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
Markets hard hit after “bubble” bursts - investors nervous
Deluge of telecom supply expected after licence auctions
Markets hard hit after “bubble” bursts - investors nervous
Deluge of telecom supply expected after licence auctions
Bonds
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
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
Loans
Investor uncertainty following market decline from March 2000 highs.
Strong telecom equity pipeline
Investor uncertainty following market decline from March 2000 highs.
Strong telecom equity pipeline
Equity
Share Price: €47-60 Bond Price: €89-91 Credit Ratings: Aa2/AA Loan Price: Libor+35-
37.5bps
Share Price: €47-60 Bond Price: €89-91 Credit Ratings: Aa2/AA Loan Price: Libor+35-
37.5bps
KPN Market data:
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to May 00
€ 0
€ 10
€ 20
€ 30
€ 40
€ 50
€ 60
€ 70
€ 80
Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00
Sh
are
Pri
ce
(€
)
50%
60%
70%
80%
90%
100%
110%
Bo
nd
Pric
e (%
)
Share Price KPN 4.75% Nov-08 Bond Price
?
BONDS
Result?
Key Features / Terms
Offer Size
KPN NV
€6.0bn equivalent
Multi-tranche Eurobond
1, 2 and 3 years
3 day European roadshow
All “pot”
140
Joint Bookrunner
Market
Maturities
Bookbuild
No. investors
$1bn FRNdue Jun 01
€1bn FRNdue Jun 01
€2.5bn FRNdue Jun 02
€1.5bn 5.575%due Jun 03
Press Comments
Citi Role
Marketing
Issuer
o The Company announced a jumbo multi-tranche short-dated Eurobond financing through Citi:
“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
“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
Corporate bond supply increases, requiring issuers to pay higher and higher yield
Govt. spreads widen as USTs outperform
Corporate bond supply increases, requiring issuers to pay higher and higher yield
Govt. spreads widen as USTs outperform
Bonds
Continued high liquidity in the market and positive credit sentiment due to boom time
Continued high liquidity in the market and positive credit sentiment due to boom time
Loans
Continued decline from March 2000 highs, however appetite for telecom equity still exists as investors hope for recovery
Continued decline from March 2000 highs, however appetite for telecom equity still exists as investors hope for recovery
Equity
Share Price: €38-44
Bond Price: €89-90
Credit Ratings: A3/A-
Loan Price: Libor+35-37.5bps
Share Price: €38-44
Bond Price: €89-90
Credit Ratings: A3/A-
Loan Price: Libor+35-37.5bps
KPN Market data:
11
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Jul 00
€ 0
€ 10
€ 20
€ 30
€ 40
€ 50
€ 60
€ 70
€ 80
Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00 Jul-00
Sh
are
Pri
ce
(€
)
50%
60%
70%
80%
90%
100%
110%
Bo
nd
Pric
e (%
)
Share Price KPN 4.75% Nov-08 Bond Price
?
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
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
Offer Type
Pricing
Oversubscription
Citi Role
September 2001
o KPN’s objectives:
– Obtain short term financing
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
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
Bonds
Slowdown in economy raises credit concerns
Lower loan volumes compared to 2000
Low appetite for telecom names
Slowdown in economy raises credit concerns
Lower loan volumes compared to 2000
Low appetite for telecom names
Loans
Share price at historic lows. Sentiment weak towards telecom stocks.
Uncertainty over timing of economic recovery
Share price at historic lows. Sentiment weak towards telecom stocks.
Uncertainty over timing of economic recovery
Equity
Share Price: €3
Bond Price: €71-72
Credit Ratings: Baa2/BBB+
Loan Price: Libor+200bps
Share Price: €3
Bond Price: €71-72
Credit Ratings: Baa2/BBB+
Loan Price: Libor+200bps
KPN Market data:
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Sep 01
€ 0
€ 10
€ 20
€ 30
€ 40
€ 50
€ 60
€ 70
€ 80
Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01
Sh
are
Pri
ce
(€
)
50%
60%
70%
80%
90%
100%
110%
Bo
nd
Pric
e (%
)
Share Price KPN 4.75% Nov-08 Bond Price
?
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
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
Upgrade with stable outlook to BBB+/Baa1
Tighter credit protection and higher pricing
Bond Spreads
Stock Price
Ratings
Terms & Conditions
November 2001
o KPN’s objectives:
– Debt reduction
– Avoidance of “fire-sale” of assets
– Funding growth
Corporate market rebounded after Sep 11 activity.
Volatile equity market drives investors towards fixed income.
Corporate market rebounded after Sep 11 activity.
Volatile equity market drives investors towards fixed income.
Bonds
Slowdown in economy raised credit concerns
Lower loan volumes compared to 2000
Low appetite for telecom names
Slowdown in economy raised credit concerns
Lower loan volumes compared to 2000
Low appetite for telecom names
Loans
Volatile markets due to uncertainty on economic recovery
Interest rate driven market
Defensive nature of fixed line telecom stocks attractive
Volatile markets due to uncertainty on economic recovery
Interest rate driven market
Defensive nature of fixed line telecom stocks attractive
Equity
Share Price: €4-6
Bond Price: €72-85
Credit Ratings: Baa2/BBB-
Loan Price: Libor+200bps
Share Price: €4-6
Bond Price: €72-85
Credit Ratings: Baa2/BBB-
Loan Price: Libor+200bps
KPN Market data:
KPN Trading History
Share Price and Bond Price Performance – Jan 99 to Nov 01
€ 0
€ 10
€ 20
€ 30
€ 40
€ 50
€ 60
€ 70
€ 80
Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01
Sh
are
Pri
ce
(€
)
50%
60%
70%
80%
90%
100%
110%
Bo
nd
Pric
e (%
)
Share Price KPN 4.75% Nov-08 Bond Price
?
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
Existing shareholders given preferential allocation
Fully underwritten
€4.90 – 18.6% discount to pre-announcement price
44%
22nd November to 6th December
75%
Joint Lead Manager
Offer Type
Pricing
% of Enlarged Co
Bookbuilding Period
Take up by Existing Shareholders
Citi Role
18 September 2003S
tock
Pri
ce
Per
form
ance
5.0
5.5
6.0
6.5
7.0
7.5
01-Jan 01-Feb 01-Mar 01-Apr 01-May 01-Jun 01-Jul 01-Aug 01-Sep
KP
N S
ha
re P
ric
e (
€)
Performance Since 12-Mar
KPN: 21%
Sector: 30%
Market: 36%
KPN price on 18-Sep: €6.75
KPN Objectives
Remove overhangMinimum impact on share priceQuick, efficient process
Remove overhangMinimum impact on share priceQuick, efficient process
Competitive auction of a block of shares (“Block trade”)
Government Objectives
Raise finance from non-core stakesAchieve maximum price for themQuick, efficient process
Raise finance from non-core stakesAchieve maximum price for themQuick, efficient process
ITS 5:30PM ON THAT THURSDAY,
YOU GET THE CALL...
Block-Trade Exercise
Student Hand-out
Parameters of the Auction
Number of shares being sold
300 million
Reference price per share
Indicative auction value
€6.75 €2,025 million
Split into teams of 5/6Teams will bid against each other to win the auctionSplit into teams of 5/6Teams will bid against each other to win the auction
Pro
cess
Teams
15 minutes for your team to decide what price to bidSubmit price in € per share in sealed envelope15 minutes for your team to decide what price to bidSubmit price in € per share in sealed envelope
Deliberation
Goal is to win the auction, but not lose money!!!
Explanation of factors to considerViews from key decision-makers in the processExplanation of factors to considerViews from key decision-makers in the process
Considerations
Whichever team bids the highest price per share will winBut, 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
Whichever team bids the highest price per share will winBut, 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
Winner! (or are they?)
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)
Bid Prices
Profit & Loss
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
€5.00
€5.50
€6.00
€6.50
€7.00
€7.50
12-Mar
26-Mar
09-Apr
23-Apr
07-May
21-May
04-Jun
18-Jun
02-Jul
16-Jul
30-Jul
13-Aug
27-Aug
10-Sep
KP
N S
ha
re P
ric
e
KPN European Telecoms Sector (rebased)
10% underperformance
General Block Trade Information
-4.1%-3.6%
-2.9%
-6.1%
-4.2%
-5.0%
-7.0%
-2.8%
-5.0%
-4.4%
-1.6%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03
Dis
co
un
t to
Pre
-An
no
un
cem
en
t
Average: -4.3%
o Block trades are typically executed at a discount of between 0% and 10%, but this is not a rule
o Recently, as block issuance has increased, banks have become more competitive– Tighter discount needed to win a
bid
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
€2.0bn / $2.3bn
Multiple of Average Daily Traded Volume
26x
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
Percentage of KPN
12.0%
Company Size DiscountMultiple of
Daily VolumeDid the Bank
Make Money?% of
Company
View of Independent Equity Research Analysts
Research House Recommendation12 month
Target PriceViews
“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”
Buy €7.40
“We see KPN as having a strong management team, good earnings momentum, a sound financial position and a very attractive valuation”
Buy €8.00Bank “M”
“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”
Neutral €7.10Bank “C”
“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”
Sell €5.00Bank “D”
75% of research analysts have a “Buy” rating on the shares
Advice From the Citi Team
Sales / ResearchSales / Research
“This is a great stock which we have been recommending our clients to buy”
“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”
“This is a great stock which we have been recommending our clients to buy”
“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”
Equity Capital MarketsEquity Capital Markets
“We want to win this deal. It is a very prestigious transaction”
“Winning is very important to our franchise, league table position and budget”
“It is going to be a very competitive process and we need to bid aggressively”
“We want to win this deal. It is a very prestigious transaction”
“Winning is very important to our franchise, league table position and budget”
“It is going to be a very competitive process and we need to bid aggressively”
Senior ManagementSenior Management
“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”
“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”
TradingTrading
“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”
“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”
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...
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
0
50
100
150
200
250
300
350
400
450
Demand KPN price Demand target
Citi briefs salesforceOrder book
opens
Citi briefs salesforceOrder book
opens
07:00
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
KP
N S
ha
re P
ric
e (
€)
0
50
100
150
200
250
300
350
400
450
Demand KPN price Demand target
Demand received for half the deal
Demand received for half the deal
07:30
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
0
50
100
150
200
250
300
350
400
450
Demand KPN price Demand target
Demand equals deal size
Shares at €6.83
Demand equals deal size
Shares at €6.83
08:15
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
0
50
100
150
200
250
300
350
400
450
Demand KPN price Demand target
Transaction closed, demand
for €2.6bn
Transaction closed, demand
for €2.6bn
09:30
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
0
50
100
150
200
250
300
350
400
450
Demand KPN price Demand target
Transaction priced at €6.78
Transaction priced at €6.78
09:45
6.60
6.65
6.70
6.75
6.80
6.85
07:00 07:15 07:30 07:45 08.00 08.15 08.30 08.45 09.00 09.15 09.30 09.45
0
50
100
150
200
250
300
350
400
450
De
ma
nd
(m
sh
are
s)
Independent Views on the Transaction
“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
“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
“The offering was extremely well executed by Citi”Financial News, 29 September 2003
“Rivals described it as the most aggressive deal they had ever seen”
Financial News, 29 September 2003
“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”
International Financing Review, 20 September 2003
Independent press reports acknowledged the resounding success of the transaction
QUESTIONS