The Initial Public Offering of CTT – Correios de Portugal

The Initial Public Offering of

CTT – Correios de Portugal

Assignment done for the Financial Operations class,

On the MsC in Finance by:

Emanuel Sousa (120417029)

Maria Francesca Nuzzo (201309242)

Pedro Alves (120417057)

Pratik Ashik (201301185)

The Initial Public Offering of CTT

1

(Page left intentionally blank)


2

Index

The Initial Public Offering ............................................................. 3

CTT: The Cash Flow Machine ...................................................... 5

CTT goes from Private to Public ................................................. 23

After the IPO ................................................................................ 31


3

The Initial Public Offering

An IPO (“Initial Public Offering”) is considered to be one of the most important moments in a

company’s history. It is the moment when a company, for the first time, has its shares sold to

the general public, converting from a “private” firm to a “public” company.

The IPO is a mean of financing for the firm and is a direct alternative to the other major external

financing source: debt. As opposed to debt, where the company simply obtains a cash amount

in exchange, generally, for regular payments and repayment of the loaned amount, an IPO

requires the firm’s owners to concede part of their own equity in the business in exchange for a

one-time received amount (“raised capital”).

When performing an IPO, the owners of a company elect a percentage of their equity in the

business to be sold to the general public. These come in the form of public shares – which

together compose the “free float” – and which will be traded in a security exchange, subject to

supply and demand conditions.

Advantages and disadvantages of an IPO include, although not limited to:

Advantages Disadvantages

- Access to alternative sources of financing; - High issuing costs and fees;

- Access to cheaper capital; - Market information costs;

- Increase of public exposure; - Agency costs and loss of control;

- Activation of the market for corporate control; - Risk of not raising required capital;

- Independent share valuation - Loss of confidentiality

The process of an IPO is composed by several phases. However, the most important phase

occurs at the beginning and pertains to the selection of the investment banks that will

coordinate the whole operation, known as the “underwriters” or “syndicates”, when considering

all the banks involved. A successful IPO – usually meaning the full sale of the shares being

offered – will not only benefit the company itself, but also the underwriters, as they gain a better

reputation for conducting IPO’s and may coordinate larger ones.

However, selecting better and more known underwriters also comes with a significant cost for

the offering company due to the high issuing costs and fees, usually reaching 5 to 7% of the

gross proceeds1. The underwriters leverage on their acquired reputation from previous IPO’s to

demand fees that are higher or lower, in accordance with said reputation. “Going public”, that is,

going through an IPO, also requires significant marketing costs, information costs and agency

costs.

1 Source: http://www.pwc.com/en_us/us/transaction-services/publications/assets/pwc-cost-of-

ipo.pdf


4

An IPO should not be understood as a closed process, as it brings profound changes to the

company. After going public the firm must understand how to remain and be public. This implies

the reporting of its activities to investors, which may bear an impact on agency costs.

Information that was previously private to the company’s owners must now be disclosed to

everyone, which includes its own competitors. It also implies that the company may need to

distribute dividends or buy back some of the publicly traded shares.

In summary, an IPO is one (potentially) unique moment in the life of a company and all the

decisions related to it must be correctly pondered.


5

CTT: The Cash Flow Machine

At a Glance

CTT is the largest operator in the liberalized Portuguese postal sector with a 95% market share

in transactional mail and a network of 2,520 points of sale o.w. 624 are post offices owned by

the company and 1,896 are post agencies owned by third parties.

Figure 1 - Portuguese postal sector market shares (1H2013)

Source: ANACOM

The higher number of branches than other nation-wide players in banking or consumer retail

makes the CTT’s established network a key advantage to dissuade new entrants in its core

business. In the other hand, it also allows the group to distribute third party products (financial

products like savings deposits or insurance). On top of that, CTT relies on partnership

agreements representing 3,909 access points in Portugal that CTT uses as “pay-shop” points –

these are used by the general population to pay telecoms and utilities bills, for instance. During

2012, the company handled an average of 5.9 million items per day serving 5.3 million

households in Portugal which somehow gives us a flavour of the group network wide coverage.

The business is split into three main segments:

• Mail & Business Solutions;

• Express and parcels; and

• Financial services.

CTT derives circa 93% of their revenues from Portugal, being highly exposed to the fortunes of

the domestic market, where it offers the full-range of services, including the transactional mail,

editorial, addressed publicity, retail products, business solutions, express & parcels and

CTT 95.0%

Chronopost 1.0%

Vasp Premium 0.7% Grupo Rangel

0.6%

Others 2.8%


6

financial services. In Spain, the company also offers express & parcels services through

Tourline (subsidiary) and a network of franchisees which together represented 7% of revenues

in 2012 (~ 40% of total express & parcels). Lastly, the group is also present in Mozambique

through CORRE, a 50/50 JV representing 1% of total Express & Parcels 2012 revenues.

Figure 2 - CTT business breakdown (9m13)

Source: Data compiled from CTT presentations

In the following sections we will present a more detailed analysis of CTT’s product offer and its

positioning in each segment.

Focusing on Mail – the Cornerstone of CTT’s business

The mail segment is the main source of CTT’s revenues, representing 72% of revenues in

2012. The figure bellow breaks down the mail division of CTT (2012 figures).

Figure 3 - CTT mail segment breakdown and evolution


0%

10%

20%

30%

40%

50%

60%

70%

80%

Mail Business Solutions Financial Services Express & Parcel

% of Sales % EBITDA

76%

3% 1%7% 4% 1%

-8%-14%

0%

-7%

1%

-15%Transactional Press mail USO Parcels Adveritising mail Retail Stamps & Postcards

% of sales Volume change yoy


7

Reflecting the trend also witnessed in other European postal markets, the mail division has

been pressured by considerable volume decline (-6% CAGR 2009-12) mainly explained by:

The substitution effect caused by the use of emails; and

The economic crisis (a negative for CTT, which remains quite exposed to domestic

market ~93% of revenues) and intensification of measures to reduce costs such as

paperless initiatives

Figure 4 - Evolution of CTT's Addressed Mail Volumes, in millions


Figure 5 - Addressed Mail Volumes – CAGR (2009-12)

Source: CTT, Companies, Economist Intelligence Unit and other web-based research

0

200

400

600

800

1000

1200

1400

2009 2010 2011 2012 9m12 9m13

-3.7%

-6.4%

-8.8%

-7.3%

1.6%

2.0%

2.0%

2.3%

5.2%

5.4%

5.8%

6.3%

7.8%

8.4%

Swiss Post (Switzerland)

Post (Austria)

Bpost (Belgium)

La Poste (France)

Postnord (Sweden)

Royal Mail (UK)

CTT (Portugal)

Postitaliane (Italy)

Post NL (Netherlands)

Correos (Spain)


8

ANACOM, the authority responsible for pursuing regulatory, monitoring and enforcement

powers within the postal sector in Portugal played a major role in April 2012, when the

Portuguese postal market was fully liberalized - since then, CTT plays in a freely competitive

market. Despite the liberalization process, CTT stands by far as the market leader with a 95%

market share in the mail sector – in this segment, the group is responsible for the collection,

sorting, transportation and distribution of domestic and international mail.

The regulated mail market is also called USO (Universal Service Obligation) which should

account for the majority of the market by revenues. This activity requires a license to operate

(another barrier to entry of this sector) which in the case of CTT expires in 2020. Furthermore,

within the regulated segment of the mail market we may observe:

USO Non-reserved services (60% of CTT revenues), which comprise the universal

postal service that ensures the supply of postal services with a pre-defined quality and

permanent availability throughout the territory at affordable prices. There are currently

12 companies providing USO postal services in Portugal and 3 of them are CTT

subsidiaries.

USO Reserved services (5% of CTT revenues) encompassing the registered mail

service used in judicial or administrative proceedings, the placing of mailboxes in public

places and the sale of stamps with the denomination of Portugal.

This distinction is not merely illustrative as it embodies an important price-mix effect in the mail

segment. By law, ANACOM establishes the criteria for price hikes in USO postal services:

For the USO reserved services, there is a price cap defined by the formula2: (CPI +

CPIAF) – 0.4%.

For the USO non-reserved services, excluding the contractual mail (over 50% of mail

volume) was proposed a price cap from 2015 onwards. According the proposal, price

revisions should approximate CPI + CPIAF + 0.5% + TCF (Traffic Correction Factor, to

mitigate deviation from the initial traffic forecasts).

Moreover, as a USO provider, CTT has the right to be compensated for the net cost of USO

provided that such cost is shown to be an unreasonable financial burden (subject to several

conditions and metrics foreseen by ANACOM).

In the end, we believe that a sustainable price increase of these services may be key to partially

offset the aforementioned trend of declining volumes (shared by the whole sector). During 2013,

the company implemented a 4% average price increase for mail services after 2 years without

revising its pricing policy. Nevertheless, the price of a domestic standard letter in Portugal

remains 15% below the EU average, as shown below.

2 CPI = Consumer Price Index, CPIAF = Correction factor to adjust the deviation from the initial CPI

forecast


9

Figure 6 – Price of a domestic standard letter in Europe (Euro)

Source: CTT, DP International letter price survey Europe

Even if we adjust the letter prices by purchasing power parity, prices in Portugal would remain

9% below the EU average, which in our view points to a (theoretical) headroom for postal price

convergence in Portugal in the mid-run.

Express & Parcels: chasing the e-commerce opportunity

The company provides a broad range of Express & Parcels services and products which are not

included in the USO, including courier, collection, processing, transport and delivery services

and complementary logistics and cargo solutions in Portugal, Spain and Mozambique. In this

segment, the main drivers are economic growth and the penetration of e-commerce.

Express & Parcels in Portugal

In Portugal, this segment is fully liberalized and CTT stands as the market leader with 29%

market share (1H13).

0 0.2 0.4 0.6 0.8 1 1.2 1.4

MaltaSlovenia

CyrusRomania

SpainCzech

BulgariaEstonia

LithuaniaHungaryPortugal

NetherlandsPoland

GermanyEU Average

IrelandLuxembourg

GreeceAustriaFrance

SlovakiaSweden

ItalyUK

IcelandBelgiumFinland

SwitzerlandDenmark

Norway


10

Figure 7 - Express & Parcels market share (Portugal)

Source: ANACOM

The Express & Parcels market has three major segments:

B2B, where CTT provides the transport logistic between businesses

B2C, where CTT provides transport logistic from the business party to the end-users

and

C2X (including C2B and C2C)

In Portugal, the volume evolution of each segment has been different, as the B2B segment (-2%

volume CAGR over 2009-12) has been relatively more penalized by the economic recession

while the B2C (+11% volume CAGR) was positively impacted by the increase of e-commerce

penetration.

Figure 8 - Evolution of volumes of Express & Parcels in Portugal (millions)


29%

21%

14%

6%

6%

4%

4%

3%

14%

CTT Express Chronopost RangelGLS SEUR NACEXURBANOS DHL Others

0

10

20

30

40

50

60

70

B2B B2C C2X

2009 2010 2011 2012


11

CTT estimates that the Express & Parcels market in Portugal is worth EUR 350 million, of which

79% should come from B2B where the company has a 19% market share (vs. 29% share in the

overall Express & Parcels domestic market). In this segment, CTT also has the highest EBITDA

margins compared to its direct competitors.

Figure 9 - EBITDA margins (2012) in Express & Parcels segment in Portugal


Express & Parcels in Spain (Tourline + Franchising)

The Spanish express & parcels market, which is much more fragmented than in Portugal (is

also 11x larger), has contracted at a 2% CAGR over 2009-12. As in the domestic market case,

the volumes from B2B and B2C markets have evolved quite differently (in opposite directions):

The B2B declined on average 3% per year (macroeconomic factor), while

The B2C grown on average 6% driven by e-commerce penetration.

This market represents 40% of CTT Express and Parcels revenues (2012) and the company

stands with 3.8% market share ranking as the 9th largest player since 2009.

10.3%

6.6%5.8% 5.6%

-1.6%

4.1%

CTT Express DHL Adicional Chronopost TNT Average ofcompetitors


12

Figure 10 - Express & Parcels market share in Spain


At the profitability front, the company EBITDA margin (3.9%) is below the Spanish average

(5.6%) and the Portuguese one (10.3%). We believe the underlying reason is the franchising

model employed by CTT in this country to enable the coverage of the Spanish territory: in

Portugal, the group leverages on several economies of scale.

Financial Services: leveraging on the group network

In this unit CTT offers a wide range of financial products, ranging from:

Savings and insurance (CTT acts as a brokerage firm offering third party products,

receiving fees without assuming any activity risk. The best example is the retail savings

products of IGCP (the Portuguese Treasury & Government Debt Agency);

Payment services through CTT branches and Payshop Network. In this case, CTT

acts as a payment point for a wide range of service bills usually charging a fee.

International money transfers and other financial services. This includes the

national and international money transfer through agreements with Western union,

Eurogiro and Universal Postal Union. The company also pays pensioners on behalf of

the Portuguese Government. It is worth noticing that this activity generates a positive

net cash position due to time differences (between the collection and disbursement of

funds to beneficiaries.

This unit is probably the best example of CTT’s ability to cross-sell its products and leverage on

its broad coverage with 2,250 points of sale and 3,909 payshop agents. Given the speech of the

management team and the recent trend, we should expect the Financial Services unit to join the

Express & Parcels division as the two growth drivers going forward.

16%

12%

7%

6%

6%6%

6%

5%

4%

4%

4%

4%

20%

MRW

SEUR

ASM

MEX

NACEX

TIPSA

Enviallia

TNT

Tourline

Integra

UPS

Correos

Others


13

Figure 11 - Payment service market: leveraging on CTT network


Financial Snapshot: Cash flows by post!

In the following tables we present the data we have compiled from the income statement and

balance sheet reported by CTT. As a remark, we used the most recent data at the time of the

IPO (the 9m13 consolidated financial accounts).

Income Statement Items

9m Period Year ended in 31 December CAGR

2010-12 2013 2012 2012 2011 2010

Sales and services rendered . . . . . . . . . . 509.7 520.2 699.3 741.9 779.9

Other operating income . . . . . . . . . . . . . 10.233 9.074 14.893 23.917 17.965

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . 520.0 529.3 714.2 765.8 797.8 -5.4%

chg % -2.0% n.a. -5.7% -4.9% n.a.

Cost of sales . . . . . . . . . . . . . . . . . . . . . -11.5 -13.2 -18.5 -18.4 -17.0

External supplies and services . . . . . . . . . -176.2 -183.4 -246.4 -256.5 -273.3

Staff costs . . . . . . . . . . . . . . . . . . . . . . . -231.6 -243.1 -333.3 -358.1 -382.0

EBITDA 93.3 82.8 104.3 112.0 109.0 -2.2%

EBITDA margin % 17.9% 15.6% 14.6% 14.6% 13.7%

Impairment of inventories and receivables -1.9 -0.1 -0.8 -3.1 -0.5

Impairment of non-depreciable assets . . .

-1.9 -2.7

Provisions, net . . . . . . . . . . . . . . . . . . . . -4.8 -12.3 -21.9 -6.3 -5.5

Depreciations and Amortisations ……………..

-19.5 -17.5 -24.6 -22.3 -24.2

in % of revenues -3.8% 0.0 -3.4% -2.9% -3.0%

Other operating costs . . . . . . . . . . . . . . . -7.4 -6.7 -11.6 -18.9 -13.8

EBIT 67.0 52.9 57.0 80.3 78.7 -14.9%

EBIT margin % 12.9% 10.0% 8.0% 10.5% 9.9%

Interest expenses . . . . . . . . . . . . . . . . . . -9.0 -12.1 -16.8 -18.4 -19.2

CTT own network 324 Bank transfers 13.5 3%

CTT Partnerships 2196 Direct Debit 133.1 32%

CTT Points of Sale: 2520 ATM Payments 196.4 47%

CGD 814 CTT (inc Payshops) 78.2 19%

BCP 797 Total 421.2 100%

Galp Energia 728

BES 652

SonaeMC 482

Pingo Doce 373

Others 63

Payshop agents 3909

CTT network Payment Service Market (EUR m)


14

Income Statement Items

9m Period Year ended in 31 December CAGR

2010-12 2013 2012 2012 2011 2010

Interest income . . . . . . . . . . . . . . . . . . . 6.7 9.6 12.4 16.1 6.6

Gains/(losses) in associated companies . . 0.0 0.2 0.2 0.1 0.0

Earnings before taxes . . . . . . . . . . . . . . . 64.9 50.6 52.8 78.1 66.1

Income tax for the period . . . . . . . . . . . . -19.6 -15.1 -16.9 -22.5 -6.9

Effective Tax rate % 30.2% 29.8% 31.9% 28.7% 10.4%

Net profit for the period . . . . . . . . . . . . . 45.3 35.5 36.0 55.7 59.3 -22.1%

Net profit for the period attributable to: 0.0 0.0 0.0 0.0 0.0

Equity holders of parent company . . . . . 45.2 35.4 35.7 55.3 59.0

Non-controlling interests . . . . . . . . . . . . . -0.1 -0.2 -0.2 -0.4 -0.3

Source: Data compiled from CTT financial statements

Summarized Balance Sheet 9m Period Year ended in 31 December CAGR

2010-12 2013 2012 2012 2011 2010

Net Tangibles 223.3 n.a. 259.1 269.2 265.5

Intangibles 13.3 n.a. 14.4 15.1 14.1

Goodwill 25.1 n.a. 25.5 25.5 25.5

Net Working Capital 77.1 n.a. 69.7 106.3 75.6

in % of revenues 15% n.a. 10% 14% 9%

Invested Capital 339 n.a. 369 416 381 -1.6%

Financial Investments 0.8 n.a. 0.8 0.7 0.7

Other non-current assets, net 27.3 n.a. 3.4 8.7 4.4

Total Assets 367 n.a. 373 426 386 -1.7%

Group Equity 263.1 n.a. 271.9 272.8 250.0

Minorities 1.7 n.a. 1.6 1.6 1.4

Net Debt 63.7 n.a. 62.8 133.5 119.6 -27.5%

Provisions & Other Liabilities 38.4 n.a. 36.6 16.5 15.4

Total Liabilities 367 n.a. 373 424 386 -1.8%


We found quite straightforward to present the business overview and financial snapshot of CTT:

(1) a strong dominant position in the domestic market, (2) a healthy financial situation with net

cash position in the B/S and a (3) stable cash flow generation are the paramount ingredients of

CTT’s financials. On the flipside, the company sees its cash-cow segment of transactional mail

(2/3s of EBITDA in 2012) in a secular downward trend with sharp volumes decline.


15

(1) ROIC = EBIT (1-tax rate) / Invested Capital

(2) Net Debt = Financial Debt + Net Financial Services Payables + Employees Benefits - Cash

(3) Cash Conversion Rate = (EBITDA - Capex) / EBITDA

Given the sluggish or even declining top line, the solid cash flow delivery reflects in our view the

adjustment the company has been able to implement in its cost structure, addressing the new

reality of the sector. As a matter of fact, the Opex cutting has been appealing at a 6% average

during the 2010-12 due to (1) staff cost savings and (2) fixed structure streamlining, like the

shutdown of unprofitable shops, rationalization of distribution centres or the higher utilisation of

technologies in sorting and sequencing activities.

Figure 12 - Revenues and EBITDA margin evolution


Financial Highlights 9m13 2012 2011 2010CAGR

2012-10

Total Revenues 509.7 714.2 765.8 797.8 -5.4%

Operating Costs (bef. D&A and impairments) 426.7 609.9 653.8 688.8 -5.9%

EBITDA 93.3 104.3 112.0 109.0 -2.2%

EBITDA mg % 18% 15% 15% 14%

EBIT 67.0 57.0 80.3 78.7 -14.9%

EBIT mg % 13% 11% 11% 10%

Net Income 45.2 35.7 55.3 59.0 -22.2%

Profit margin % 9% 5% 7% 7%

Capex 4.0 14.0 27.0 31.0 -32.8%

in % of sales 1% 2% 4% 4%

ROIC (1) 14% 11% 14% 14%

Net Debt / EBITDA (2) 0.7x 0.6x 1.2x 1.1x

Cash Conversion Rate (3) 96% 87% 76% 72%

Dividends paid n.a. 54 36 21

Payout Ratio n.a. 97% 61% 42%

509.7

714.2765.8

797.8

10%

12%

14%

16%

18%

20%

9m13201220112010


16

We believe further Opex cuts are still to come, given the natural attrition of the company’s work

force (17% above 55 years and 33% above 50) and the reinforced flexibility of labour contracts

in Portugal (imposed by austerity programmes under Troika’s adjustment programme).

At the top line front, and despite the structural negative trend in traditional mail traffic, price

increases and the potential growth in financial services (which deliver an EBITDA margin above

40%) and the Express & Parcels drivers (economic rebound and e-commerce) sustained the

cash flow generation and are likely to persist or boost even more the financial position of the

company.

In connection, the shareholder remuneration is one of the most enticing aspects of this story. If

we exclude the “net financial services payable” or the “liabilities related to employees benefits”

(which are not interest-bearing debt), the company presents an impressive net cash position in

its B/S which coupled with solid and increasing payout ratios, may position CTT as a cash flow

machine.

How CTT compares against its peers?

Looking at the European postal sector, we found 5 listed players that may be regarded as

comparable.

Oesterreichische Post AG (Austria)

Bpost (Belgium)

Deutsche Post (Germany)

Post NL (Netherlands) and

Royal Mail (UK).

Still, we note some differences may hinder a direct comparison of financial indicators, namely

pension plans (with embedded liabilities), different exposures to business segments, different

levels of e-commerce penetration or e-substitution, between others.

The company has 67% exposure to traditional mail, above the 59% average for its peers which

may be deemed as a negative point, as this segment is experiencing a secular volume erosion.

On the other hand, CTT also presents a top-notch EBITDA margin (14.6% in 2012 vs. 11.2%

peer average).


17

Figure 13 - Business split of CTT peer group

Source: Companies, data compiled from CTT presentations

What comes in the next mail?

Going forward, we assume a solid cash flow delivery backed by solid drivers, CTT positioning

and strategy for the next years. With 72% of revenues (and 65% of EBITDA) coming from the

mail segment (in a structural downward trend, - 6.3% CAGR 2009-12 in volumes), the CTT

strategy is likely to focus on 4 levers:

EBITDA protection through price increases

Opex optimization

Leveraging on its network to capture the expected growth of Express and Parcels

market (mainly in B2B segment); and

Expansion of the Financial Services unit, where EBITDA margins overcome 40%,

leveraging on the nation-wide retail network

Figure 14 - Sales and EBITDA evolution - our forecasts (2013-18)

17%

52%64%

72%79%

84%

29%

48%

36% 17% 7%

16%

54%

11% 15%

Deutsche Post Royal Mail Austrian Post CTT Bpost PostNL

Mail Express & Parcel Other

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2013E 2014F 2015F 2016F 2017F 2018F

EBITDA marginSales Growth EBITDA margin Sales growth


18

Valuation: our price reference ahead of the IPO

In this section we present our DCF-based valuation of CTT. At this stage, we wanted to come

up with a theoretical reference of what could be the price (or the range of prices) to be defined

by investment banks during the IPO process.

Besides the strong cash flow generation capacity, our financial projections assume an ongoing

transformational path – we believe CTT is far from reaching a steady state and we tried to

reflect both the evolving trends in the market and the company’s 4-pillars strategy (identified

above).

Given the 150 million shares outstanding (after the IPO), we reached a YE13 Fair Value of EUR

5.31 using a 9.4% WACC (4% after-tax cost of debt, 10% Net Debt / EV and 10% cost of

equity). We also assume revenues and EBITDA CAGR during 2013-30 (the explicit forecast

period) of +1.6% and 0.3%, respectively. The implicit exit EBITDA multiple in the terminal value

calculation is 5.9x which we recognize might seem rather conservative.

Below we present our DCF model, the main discount rate and perpetuity assumptions, the

sanity checks (stabilization of fundamental drivers, convergence of ROIC to the cost of capital)

and sensitivity analysis made during the evaluation process.


19

DC

F2012

2013E

2014F

2015F

2016F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

2026F

2027F

2028F

2029F

2030F

Revenues

714.2

703.5

696.5

703.4

714.0

728.3

746.5

765.1

788.1

807.8

824.0

840.4

857.2

872.2

885.3

896.4

905.4

914.4

923.6

Chg %

-5.7

%-1

.5%

-1.0

%1.0

%1.5

%2.0

%2.5

%2.5

%3.0

%2.5

%2.0

%2.0

%2.0

%1.8

%1.5

%1.3

%1.0

%1.0

%1.0

%

(+) E

BIT

DA

104.3

123.1

123.6

128.4

133.9

140.2

145.2

150.4

154.9

154.2

152.6

150.9

149.1

146.8

144.0

140.7

137.0

133.2

129.3

Chg %

-6.8

%18.0

%0.4

%3.8

%4.3

%4.7

%3.6

%3.6

%3.0

%-0

.4%

-1.0

%-1

.1%

-1.2

%-1

.6%

-1.9

%-2

.3%

-2.6

%-2

.8%

-2.9

%

EB

ITD

A m

arg

in14.6

%17.5

%17.8

%18.3

%18.8

%19.3

%19.5

%19.7

%19.7

%19.1

%18.5

%18.0

%17.4

%16.8

%16.3

%15.7

%15.1

%14.6

%14.0

%

D&

A24.6

26.0

25.1

23.9

21.4

23.3

25.4

26.8

27.6

29.1

31.3

33.6

36.0

39.3

39.8

38.1

36.2

34.3

32.3

in %

of S

ale

s3.4

%3.7

%3.6

%3.4

%3.0

%3.2

%3.4

%3.5

%3.5

%3.6

%3.8

%4.0

%4.2

%4.5

%4.5

%4.3

%4.0

%3.8

%3.5

%

(-) Opera

ting T

axes

20.3

26.2

26.6

28.2

30.4

31.6

32.3

33.4

34.4

33.8

32.7

31.7

30.5

29.0

28.1

27.7

27.2

26.7

26.2

(-) Capex

14.0

7.0

13.9

21.1

25.0

26.9

29.9

30.6

31.5

32.3

37.1

40.3

42.9

43.6

44.3

40.3

40.7

39.3

37.9

in %

of S

ale

s2.0

%1.0

%2.0

%3.0

%3.5

%3.7

%4.0

%4.0

%4.0

%4.0

%4.5

%4.8

%5.0

%5.0

%5.0

%4.5

%4.5

%4.3

%4.1

%

Net W

orkin

g C

apita

l77.1

98.5

97.5

112.6

114.2

116.5

115.7

116.5

122.2

125.2

129.4

134.5

137.2

139.6

141.7

143.4

144.9

146.3

147.8

in %

of S

ale

s10.8

%14.0

%14.0

%16.0

%16.0

%16.0

%15.5

%15.2

%15.5

%15.5

%15.7

%16.0

%16.0

%16.0

%16.0

%16.0

%16.0

%16.0

%16.0

%

(-) NW

C n

eeds

-36.6

21.4

-1.0

15.0

1.7

2.3

-0.8

0.8

5.6

3.1

4.2

5.1

2.7

2.4

2.1

1.8

1.4

1.4

1.5

(=) F

CFF

106.7

68.5

84.1

64.0

76.8

79.4

83.8

85.6

83.3

85.0

78.6

73.8

73.0

71.7

69.5

70.9

67.6

65.7

63.8

Chg %

-35.8

%22.8

%-2

3.8

%20.0

%3.3

%5.5

%2.1

%-2

.6%

2.0

%-7

.5%

-6.1

%-1

.1%

-1.8

%-3

.1%

2.0

%-4

.6%

-2.8

%-2

.9%

Dis

co

un

ted

FC

FF

68.5

76.8

53.5

58.7

55.4

53.4

49.9

44.4

41.4

35.0

30.0

27.1

24.4

21.6

20.1

17.5

15.6

13.8

Valu

e C

reatio

n2012

2013E

2014F

2015F

2016F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

2026F

2027F

2028F

2029F

2030F

WA

CC

9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%9.4

%

RO

IC =

(a) x

(b)

17.5

%20.8

%21.9

%22.3

%23.7

%24.2

%24.6

%25.0

%25.1

%24.2

%22.9

%21.5

%20.2

%18.9

%18.0

%17.6

%17.1

%16.5

%15.9

%

(a) E

BIT

marg

in a

fter ta

xes

8.3

%10.1

%10.3

%10.8

%11.5

%11.7

%11.7

%11.8

%11.8

%11.3

%10.7

%10.2

%9.6

%9.0

%8.6

%8.4

%8.1

%7.9

%7.7

%

(b) A

sset T

urn

ove

r2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x2.1

x


20

Asset beta (based on 5 peers average) 0.85 Perpetuity

D / EV (assuming conservative leverage) 10% g 1.0% Peers Capital Structure D / EV

Tax rate 27% ROIC 10.0% Deutsche Post AG 24%

Equity Risk Premium (historical evidence) 6.0% WACC 9.4% Post NL 50%

Risk Free Rate (German Bond Yields before f inancial crisis) 3.0% Oesterreichische Post AG 11%

Credit spread (based on Damodaran's w eb-page) 1.0% Bpost NV 10%

Country risk premium (based on Damodaran's w ebpage) 1.5% Royal Mail 26%

Rd pre tax 5.5% Average = Median 24%

Rd after tax 4.0%

Levered beta 0.92

Re 10.0%

WACC 9.4%

WACC - Main Assumptions

Sum of DCF (explicit forecast period) 707.1

Terminal Value 764.8

Discounted Terminal Value 165.7

Enterprise Value 872.8

(+) Net cash -63.7

(-) Provisions & Other Liabilities 38.4

(-) Minorities 1.7

(+) Fin. Investments & Other Assets 28.1

Equity Value 797.1

# of shares after the IPO (millions) 150

Value per share (Eur) 5.31

WACC

5.3 9.3% 9.5% 9.8% 10.0% 10.3% 10.5% 10.8%

8.7% 5.76 5.77 5.77 5.78 5.78 5.78 5.79

8.9% 5.60 5.61 5.61 5.61 5.62 5.62 5.62

9.2% 5.45 5.45 5.46 5.46 5.46 5.47 5.47

9.4% 5.30 5.31 5.31 5.31 5.32 5.32 5.32

9.7% 5.17 5.17 5.17 5.18 5.18 5.18 5.18

9.9% 5.04 5.04 5.04 5.05 5.05 5.05 5.05

10.2% 4.91 4.92 4.92 4.92 4.92 4.93 4.93

Perpetuity ROIC

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

2.2x

2.4x

2.6x

2.8x

3.0x

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

2012 2014F 2016F 2018F 2020F 2022F 2024F 2026F 2028F 2030F

WACC ROICEBIT margin (after taxes) Asset Turnover (x)


21

In the end, our DCF-based fair value of EUR 5.31 implies a 7.1x EV / EBITDA, within in the

range of CTT peer group (6.3x average multiple).

Table 1 - CTT peer group EV / EBITDA multiples

EV / EBITDA multiples (2014F)

Royal Mail (UK) 7.2x

Deutsche Post (Germany) 7.1x

Osterreischische Post (Austria) 7.1x

Implied CTT multiple from DCF 7.1x

PostNL (Netherlands) 5.4x

Bpost (Belgium) 4.9x

Average European Peers 6.3x

Average ex PostNL and Bpost 7.1x

Source: FactSet, our estimates

We believe there are several reasons that may justify such premium, namely:

Strong operating margin expansion backed by further Opex cuts potential

Price increases in traditional mail and expected rebound in economic activity in Iberia

Fee-based financial services and the parcels business may enhance further growth and

cash flow generation (units with above-average margins).

WACC

5.3 12.5% 13.0% 13.5% 14.0% 15.0% 16.0% 17.0%

8.7% 5.47 5.57 5.67 5.78 5.98 6.19 6.39

8.9% 5.32 5.42 5.52 5.61 5.81 6.00 6.20

9.2% 5.18 5.28 5.37 5.46 5.64 5.83 6.01

9.4% 5.05 5.14 5.23 5.31 5.49 5.66 5.84

9.7% 4.93 5.01 5.09 5.18 5.34 5.51 5.67

9.9% 4.81 4.89 4.97 5.05 5.20 5.36 5.52

10.2% 4.70 4.77 4.85 4.92 5.07 5.22 5.37

2030 EBITDA margin

WACC

5.3 0.5% 0.7% 0.9% 1.0% 1.5% 2.0% 2.5%

8.7% 5.76 5.76 5.77 5.78 5.80 5.82 5.85

8.9% 5.60 5.60 5.61 5.61 5.63 5.65 5.67

9.2% 5.45 5.45 5.46 5.46 5.47 5.49 5.50

9.4% 5.30 5.31 5.31 5.31 5.32 5.33 5.35

9.7% 5.17 5.17 5.17 5.18 5.18 5.19 5.20

9.9% 5.04 5.04 5.04 5.05 5.05 5.06 5.06

10.2% 4.92 4.92 4.92 4.92 4.93 4.93 4.93

Perpetuity growth rate


22

On top of that, if we exclude PostNL and Bpost from the peer group, our fair value would be in

line with the European sector average (7.1x). As a matter of fact, we should be aware of the

weaknesses in this benchmark: for instance, PostNL has a rather leveraged position (2x Net

Debt / EBITDA), while Bpost faces a litigation process with the European Commission and may

be obliged to return circa Eur 300mn.

Lastly, if we use the highest multiple (defined by Royal Mail) of 7.2x EV/EBITDA our valuation

would jump to EUR 5.43, not a massive change.

Table 2 - Applying the upper-end of the peer group multiples

Given our assumptions, the price range defined by the leading investment banks during the

roadshows (4.10 – 5.52) which eventually led to a final offering price of EUR 5.52/share seems

fair, and in our view the choice for the upper limit of the range translates the positive momentum

of the stock market which at that time welcomed public offering with strong appetite. In addition,

it also reflects the “extra-drivers” of CTT when compared to its peers.

Royal Mail EV/EBITDA 2014F multiple 7.2x

EV 890.1

(+) Net cash -63.7

(-) Provisions & Other Liabilities 38.4

(-) Minorities 1.7

(+) Fin. Investments & Other Assets 28.1

Equity Value 814.4

# of shares after the IPO (millions) 150

Value per share (Eur) 5.43


23

CTT goes from Private to Public

Portugal: license to sell

In 2011 Portugal was a country still struggling to recover from the 2007/08 financial crisis.

Carrying significant public debt and having high levels of budget deficits (which majorly affected

the high number of state-owned companies), it resorted to the signing of a Memorandum of

Understanding (MoU), in May 2011, with the International Monetary Fund (“IMF”), the European

Commission (“EC”) and the European Central Bank (“ECB”), collectively known as the “Troika”,

requesting financial assistance.

In exchange for up to €78 billion in assistance, provided by the Troika, Portugal accepted to

comply with a set of reforms that composed the Economic Adjustment Programme for Portugal,

and which focused on three pillars: fiscal consolidation, structural reforms and financial stability,

with the objective of bringing mid-to-long term sustainability to the Portuguese economy.

Included in this programme was the commitment, by the Portuguese Government, to reduce the

number of state-owned companies, thus reducing budget spending, through a process that is

commonly called “privatization”3.

From 2011 to 2014, the period which comprises the length of the MoU, the Portuguese

government had successfully sold some high-profile companies (although retaining partial or

residual equity ownership in most of the sold firms). Among them were EDP and GALP in the

energy sector, the airport operator ANA, and CTT Correios de Portugal, which is a mailing and

logistics operator.

CTT Correios de Portugal (hereafter “CTT”) is one of the oldest companies operating in

Portugal, being founded in 1520 by King Manuel I under the name Correio Público. It is one of

the major and most recognizable brands in the country, ranking among the most trusted

companies in the country. At the time, it held a very significant market share of the core mail

business (95% in June 2013), with operations in Portugal, Spain and Mozambique. It was also

fully held by Parpública, a state-owned company.

All of the companies sold under the privatization programme were disposed through public

tenders, equity offerings or direct sales under tender processes. CTT was elected by the

Portuguese government to be sold, as it provided a high-profile company and an attractive

target for potential buyers. However, in 2013, the decision on the method of sale of CTT, which

was expected to achieve a selling price of about 500 to 700 million euros, was not yet taken, as

CTT was considered, opposed to some of the other sold companies, as a very stable, cash-flow

3 As opposed to Anglo-Saxon languages, where the definition of a “public” and a “private”

company depend on whether it is traded in a security exchange, the Portuguese language defines a public company as a firm that is state-owned and a private company as a firm that is not state-owned.


24

producing company. The desired optimization of the sale played a major role in the continuous

delay of such decision.

There were some national and multinational investors that were interested in acquiring a major

equity participation in the Portuguese mail company, with rumors linking both the Spanish and

the Brazilian mail service companies to a potential buying of CTT. In September 2013, the

Portuguese Government received eight different buying proposals, from investors, to acquire

the company. These included the Portuguese logistics companies Urbanos and Rangel, the

latter in a partnership with the bank Montepio Geral, the Apax Partners Private Equity

Investment Group Fund (a UK private equity firm), and the mentioned Correios do Brasil.

A post from the Queen

However, no decision was made until the days surrounding the successful listing of the UK

Royal Mail company on 15 October 2013. In this operation, the British government managed to

keep a 30% stake in the company, while receiving £1.98 billion in proceeds and after threats of

continual strikes from unionized workers. Shares were offered to investors (with large investors

such as pension funds and hedge funds being given priority in the allocation) and to company

employees. After the first day of conditional trading (11 October), the UK Royal Mail share price

had risen by 38%.

Some days before the UK Royal Mail IPO (where shares were fully subscribed after just few

hours), the Portuguese secretary of state for public works, transport and communications

expressed an inclination for a CTT IPO, stating that it seemed “(…) to be the model that

potentially generates more value in a sale.” On 7 October, the Portuguese government fully

decided for an IPO, still to happen on that year, which constituted the first in five years, after the

EDP’s (one of the major energy operators in the country) renewable business spun off to form

EDP Renováveis in 2008.

Return to Sender

The listing of this major national company spun much criticism from opinion leaders and

politicians. Portugal has a tradition of state-owned companies, with banks, transportation or

energy companies being owned by the government itself, and CTT – arguably one of the

healthiest state-owned companies – was feared to be lost to “private hands”. As was the case

with its UK counterpart, major strikes by employees were announced and, in fact, done.

However, the Portuguese government was in need for the capital that a sale of CTT would

provide and maintained – being more resolute after the UK Royal Mail IPO – that a public

offering of the company that was, for about 500 years, owned by the state, would be the most

advantageous to every party involved.


25

Show me the Offer!

There were a total of 105,000,000 Shares in the Offering, representing 70% of the share capital

of CTT. The Offering was divided in two separate markets comprising: (i) the Institutional

Offering, which is an offering of 84,000,000 Shares to institutional investors within and outside

Portugal; and (ii) the Retail Offering, which is a public offering in Portugal of 21,000,000 Shares

by way of a separate Portuguese language prospectus to retail investors and CTT’s employees

in Portugal. The offering to CTT’s employees comprised up to 5,250,000 Shares, representing

3.5% of the Company’s share capital, or 25% of the Retail Offering. CTT employees purchasing

Shares in the Offering will be able to purchase such Shares at a 5% discount to the Offer Price.

The Green Shoe…

As with most IPO operations, a stabilization mechanism on the offer (usually called the

Greenshoe Option) was introduced. In the present case, 9,545,455 shares (intitled the “Option

Shares”) were sold by the Selling Shareholder (Parpública) to the underwriters. J.P. Morgan,

entitled to be the stabilizing manager, also received a Put Option which granted it the right to

sell 9,545,455 shares to the Selling Shareholder. The Selling Shareholder also received from

the syndicate a call option to purchase 9,545,455 shares from the stabilizing manager (in effect

the “Option Shares”). This operation, as with any greenshoe option, had the objective of

regulation offer and demand, effectively increasing or decreasing the number of shares being

offered in the underwriters and the selling shareholder understood to be beneficial.

According to the information sent by JP Morgan to CMVM, the stabilization mechanism was

used four times: in the first trading day (5th December) and 6, 9 and 30

th days of the same

month.

… And more details

During the IPO, one of the most crucial and relevant aspects was the apportionment criteria.

Pursuant to Resolution 62-A/2013 the investors who filed their purchasing orders no later than

the 5th business day before the expiration of the offer period would have benefited from higher

apportionment criteria than the orders who filed afterwards, in a percentage of 100%, save if

these orders may be satisfied with a lower percentage. This means that the orders filed in the

last four business days of the offer will only be, fully or partially, satisfied if there are any

remaining shares to be distributed.

The shares that are not included in the IPO or that are not purchased were determined to be

subject to a direct sale procedure to banking institutions. Clawback and clawforward

mechanisms will be implemented so that (i) a larger number of shares may be included in the

IPO if the demand is larger than the supply, by reducing the number of shares subject to the

direct sale to the banking institutions and (ii) a larger number of shares may be subject to the


26

direct sale to the banking institutions if the demand is larger than supply or to the extent the

shares offered in the IPO are not purchased.

Major Underwriters/Investment Banks

The following table sets forth the number of Shares that the Underwriters have agreed

severally, and not jointly, to purchase in the Institutional Offering.

The Company and the Selling Shareholder have given the Underwriters customary

representations and warranties under the Institutional Underwriting Agreement, including in

relation to CTT’s business, the Shares and the contents of this Offering Memorandum and the

Portuguese language prospectus. The Selling Shareholder has also given the Underwriters

customary representations and warranties under the Institutional Underwriting Agreement in

relation to, among other matters, its title to the Shares being sold by it in the Offering.

The following Pie Chart further gives an comprehensive view of the percentage of the total

outstanding shares managed by the respective underwriters.

Caixa—Banco de Investimento, S.A 33,504,546 4,295,454 37,800,000

J.P. Morgan Securities plc 33,504,545 4,295,455 37,800,000

Banco Bilbao Vizcaya Argentaria, S.A 3,722,727 477,273 4,200,000

Banco Esp´ırito Santo de Investimento, S.A 3,722,727 477,273 4,200,000

Total 74,454,545 9,545,455 84,000,000

Number of

shares

Number of

option shares

Total numbers

of shares

UNDERWRITERS

Table 3 – Underwriters in CTT’s IPO

Figure 15 – Percentage of shares managed by the underwriters


27

The Selling Shareholder would eventually receive net proceeds of approximately A 571.5

million, reflecting the deduction of underwriting commissions (which will be in the maximum

amount of A4.9 million), as well as certain expenses incurred in connection with the Offering.

Principal and Selling Shareholders

PARPUBLICA (the ‘‘Selling Shareholder’’) - Participa¸c˜oes P´ublicas (SGPS), S.A., a holding

company incorporated under the laws of Portugal and controlled and wholly owned by the

Republic of Portugal is the major shareholder of the company holding more than 30% stake in

the company followed by Goldman Sachs (5%) and then Pioneer Asset Management and J.P.

Morgan each controlling 2.1% respectively. The rest of the shares (less than 2%) are held by

other retail shareholders.

Figure 16 – Principal shareholders and their controlling stake

Use of Proceeds from IPO

Assuming that the maximum number of Shares were sold to CTT’s employees and that neither

the Put Option nor the Call Option were exercised, the Selling Shareholder received net

proceeds of approximately EUR 571.5 million, reflecting the deduction of underwriting

commissions (which will be in the maximum amount of EUR 4.9 million), as well as certain

expenses incurred in connection with the Offering. CTT didn’t received any proceeds from the

sale of the Shares offered by the Selling Shareholder, although it paid approximately 4 million

(excluding VAT) in expenses incurred in connection with the Offering.

The Selling Shareholder applied the proceeds received in accordance with the law and its

articles of association. Those proceeds were in particular used by the shareholder of the Selling

Shareholder to reduce public debt.

31.50%

5.00% 2.10% 2.10%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Parpública Goldman Sachs Pioneer AssetManagement

JP Morgan

Sales


28

Road Show/Book Building

The underwriters conducted extensive meetings across different cities with potential investors

and top executives from different financial institution and presented business outlook for the

firm, prime reason behind IPO, growth on investment and related financial information to gain

an understanding of the demand and possible sale price for the shares to be issued and

accordingly came up with the price range of € 4.10 to € 5.52 each.

Invariably with the motivation to maximize the value from the deal for the all the involved parties,

acting in the best interest of the concerned stakeholders and leveraging the existing momentum

in the stock market for companies of similar profile riding on the successful IPO of Royal Main in

UK eventually fixed the sale price at € 5.52 each share.

Offering price

The offering price was set at € 5.52. At the beginning the range was stipulated to be somewhere

between € 4.10 and € 5.52, but given the strong demand for the shares the upper limit of the

price range was chosen (i.e. € 5.52).

Looking at some of the comparable companies multiples (EV/EBITDA 14) we find the highest

value for the EV / EBITDA ratio to be associated with the UK Royal Mail company, reaching

7.2.x. The € 5.52 price per share set in the IPO implies, according to our EBITDA projections, a

7.3x EV/EBITDA multiple (2014F). This would position CTT in the higher end of its comparable

companies range, which somehow reflects (1) the stock market momentum and appetite for

IPOs and (2) the strong cash flow generation of CTT coupled with its additional triggers going

forward (check previous section).

Table 4 – EV / EBITDA multiples of CTT’s comparable companies (from FacSet)

EV / EBITDA multiples (2014F)

Royal Mail (UK) 7.2x

Deutsche Post (Germany) 7.1x

Osterreischische Post (Austria) 7.1x

PostNL (Netherlands) 5.4x

Bpost (Belgium) 4.9x

Average European Peers 6.3x

Average ex PostNL and Bpost 7.1x

The lockup period

A lock-up period, also known as a lock in, lock out, is a predetermined amount of time following

an initial public offering where large shareholders, such as company executives and investors


29

representing considerable ownership, are restricted from selling their shares. Lockups are

designed to prevent insiders from liquidating assets too quickly after a company goes public.

In connection with the Offering, the Company agreed to certain restrictions on the sale or other

disposition of Shares for a period of 180 days from the date of the Institutional Underwriting

Agreement. The Selling Shareholder too agreed to similar restrictions for a period of 270 days

from the date of the Institutional Underwriting Agreement or, in the case of the Option Shares,

90 days from the date hereof. Following the expiry of the Lock-Up Period, the Selling

Shareholder will be able to sell the remaining Shares it holds and the Company will be able to

sell Shares.

In addition, the Selling Shareholder may be required, pursuant to applicable law (including

securities law, the laws applicable to state shareholdings or other) or otherwise, to sell all or

part of the Option Shares after the expiry of the applicable Lock-Up Period, as part of the Selling

Shareholder’s commitment to relinquish control of the Company.

CTT’s employees will have an option to purchase up to 5% of the CTT’s shares at a discount,

these shares being subject to a 90-day lock-up period.

Applicable Portuguese and European Law

The postal industry is heavily regulated, including by national, EU and global regulatory bodies.

CTT is therefore subject to significant regulations in Portugal and in other jurisdictions. This

section is intended to provide a general overview of the regulations—at a national, EU and

international level—applicable during CTT’s IPO or business in general that the company will be

subjected to after the IPO.

CTT operates primarily in the postal sector, along with secondary involvement in the financial

services sector. As a result, its activities are subject to government regulation on a number of

fronts. After the IPO the company, CTT ceased to be classified as a Public Company (A

company wholly owned by State). However, due to a portion of the Shares (30%) held by the

State, the Company was qualified as a non-controlled company subject to Decree Laws defined

by State for such companies. Along with the Portuguese legal framework applicable to non-

controlled companies, CTT was now subject to applicable national and European competition

laws and to other general commercial laws.

CTT is now subject to supervision by the ANACOM, which is the authority holding regulatory,

monitoring and enforcement powers in the postal service sector, under the Postal Law and its

Statutes, approved by Decree-Law no. 309/2001 dated 7 December 2001.

CTT also now has extensive duties of disclosure and notification to the ANACOM. In particular

CTT must provide the ANACOM with all information related to its activity, including: (i) financial


30

information, (ii) information concerning the provision of postal services and (iii) contracts or

agreements concluded with third parties regarding the access to its network.

Underwriter fees

Investment banks were planned to receive up to € 4.9 million, representing about 1% of the

gross revenues from the whole operation, if the offering price was chosen to be €5.52. This

compares favourably with the typical fees charged by investment banks in US operations

(usually between 5 and 7% of the gross proceeds). It is also a lower percentage than the one

effected in the UK Royal Mail IPO, where investment banks received fees of about 24 million

pounds, representing 1.2% of the amount raised in the sale. CTT has benefited, thus, from a

lowering of what is arguably one of the most significant costs of an IPO for any company.


31

After the IPO

On December 5th, 2013, CTT started trading EURONEXT Lisbon Stock Exchange. From the

potential pricing range announced in November of that year - €4.10 to €5.52 per share – it was

the higher value that prevailed, with CTT shares being listed at €5.52 each. The Portuguese

mail company was, as a result, valued at €828 million.

Trading opened at €5.91 per share, an increase of 7.07% over the offering price, having

reached a maximum of €5.95 (+7.79% over offering price). On the other hand, trading closed at

€5.54, revealing a first day variation of just 0.36%.

It’s all about the underpricing!

On January 6th, 2014, one month after the IPO, the CTT shares were being traded at €5.75,

revealing a one month underpricing of 3.8%. At this point, it becomes extremely relevant to cite

the seminal work done by Roger G. Ibbotson, in his work titled “Price Performance of Common

Stock New Issues”4. By measuring both the initial and the aftermarket performance of newly

issued common stocks, during the 1960s, Ibbotson found that:

“(…) the mean initial performance of unseasoned new issues is positive. However, the

distribution is peaked and positively skewed with fat tails. We cannot reject the hypothesis that

an investor in a single random issue has an equal chance for a gain or loss. However, he does

have a far higher likelihood of an extremely large positive performance than a correspondingly

large negative performance.” (pp. 265)

Ibbotson brought to the forefront of the finance studies the problematic of IPO underpricing,

finding that issues of new shares were usually 11% below their true market value.

Maria Rosa Borges studied the same problematic, although this time in Portugal, in a work

published in 20075. Borges focused on two main moments of the Portuguese stock market:

what is called the “hot issue” market of 1986 and 1987, and the period after, ranging from 1988

to 2004. The hot issue market of 86/87 was characterized by significant tax incentives provided

for companies to go public, which prompted the Portuguese stock index to rise 280% in 1987

and an unprecedented 57 Initial Public Offerings in those two years. During this period, IPOs

showed an initial underpricing of 33.1%.

During the “more normal” period after 1987, up until 2004, the number of IPOs diminished

drastically to just 43, an average of 2.5 per year, including a period between 2001 and 2004

where no Public Offerings were made. In this sample, Borges found a statistically significant

underpricing of 11.1% in initial period (which is a considerable decrease from the 33.1%

4 Published on Journal of Financial Economics 2 (1975), pp. 235-272

5 “Underpricing of Initial Public Offerings: The Case of Portugal”, International Advanced

Economic Research, 13, (2007), pp. 65-80


32

observed in the earlier period), with book-building IPOs showing higher initial returns than fixed-

price or auction offerings.

In CTT’s case, the one month return, as stated above, was 3.79%, revealing a small

underpricing in the share’s price. However, more recent developments have prompted the share

price to increase considerably.

Three months after the Initial Public Offering, at March 6th 2014, the stock closed trading at

€7.26, an increase of 31.05% over the offering price, leveraging on the ongoing de-risking of the

Portuguese economy, where CTT maintained a huge part of its operations. On May 31st, 2014,

the share still rose to achieve €7.43. The figures below present both the one and the three

month historical price evolution of CTT’s share price.

Figure 17 – CTT’s share price one month evolution

Figure 18 – CTT’s share price three month evolution

Almost 40 years after Ibbotson’s work, offering’s underpricing remains one of the most relevant

topics in Corporate Finance, since in practice underpricing means that a company’s owners sold

their stake at a lower price than the one they could potentially obtain. Although it is unequivocal


33

that IPO underpricing exists in a consistent fashion, and across multiple countries, there isn’t a

single explanation for the fact.

Theories have been proposed with some of the most relevant being that companies and

investment banks actually benefit from underpricing, the existence of informational asymmetry,

and the winner’s curse. The first is intrinsically related to the underwriter’s and the issuer’s wish

for the IPO to be successful. Richard A. Brealey and Stewart C. Myers put it in this way:

“(…) many investment bankers and institutional investors argue that underpricing is in the

interests of the issuing firm. They say a low offering price on the initial offer raises the price of

the stock when it is subsequently traded in the market and enhances the firm’s ability to raise

further capital.”6

Given the circumstances of CTT’s IPO, namely the fact that it was the first to take place in five

years, one could argue that it was a one-time opportunity (or at least one in a long time) from

the investment banks involved in the process to build some reputation. Concurrently, Parpública

wanted to get the most out of the sale but, at the same time, needed to assure that it was a

successful undertaking.

The British and Belgian cases

It proves useful to compare the CTT’s share price evolution with the one experienced by two of

its most close peers: UK Royal Mail and Bpost. UK Royal Mail was first listed October 11th,

2013, while Bpost, the Belgian Post Group, started trading on June 21st, 2013. Both companies,

thus, made their IPO in close dates to the one of CTT, with Bpost, however, not being owned

majorly by its government, as opposed to UK Royal Mail and CTT.

A graphical representation of the first 90 days of the three companies is presented below, with

daily historical changes:

6 Brealey, Richard A. and Myers, Stewart C., “Principles of Corporate Finance”, 7

th edition, The

McGraw-Hill Companies (2003)


34

Figure 19 – Historical share price daily changes after IPO for CTT, UK Royal Mail and Bpost7

As can be understood by looking at the graphic above, CTT followed a similar trend to the one

presented by the UK Royal Mail, with the difference of revealing an undervaluation later.

Opposed to both these cases, however, Bpost remained quite stable throughout its first 90 days

of trading, revealing no significant undervaluation.

Comparing with Portugal

It is interesting also to compare the daily changes of CTT share price in its first 90 days of

trading with the daily changes of the major Portuguese stock index, the PSI 20. In the graphic

below, it can be observed that both daily changes are very similar, although CTT seemed prone

to increase at a greater scale on the 90 days period.

Figure 20 – Historical daily changes of CTT share price and PSI 20’s price

7 Changes are estimated from the opening price of the first day of trading for each individual

share. The initial price reference was established as 100 for the three.

15.35%

27.90% 33.99%

80

90

100

110

120

130

140

150

0 30 60 90

CTT UK Royal Mail Bpost

80

90

100

110

120

130

140

150

0 30 60 90

CTT PSI 20


35

On March 12th, 2014, CTT presented its first annual report as a listed company, with a 1.3%

decrease in Revenues, a 16.2% increase in EBIT and a 26.8% increase in Net Profit attributable

to equity holders (considering consolidated Recurring values). The table below provides a

snapshot of CTT’s Consolidated Results8:

Figure 21 – Consolidated Results for CTT

Finally, CTT was listed in the PSI 20. It was incorporated in the major Portuguese stock index

along with the media company Impresa and the building company Teixeira Duarte, replacing

Cofina, which is also a media company, the engineering company Soane Indústria and

Sonaecom, a communications company that had recently entered a merging deal with another

Portuguese company. On its first day trading as a major index company, CTT closed session

with a decrease of 2.75%, on € 7.78.

8 Source: CTT Annual Report, titles “Consolidated Results of 2013”


36

APPENDIX: CTT OPERATING DATA

Source: CTT

Operating Data 9m Period As of 31 December

2013 2012 2012 2011 2010

Mail business unit:

Total items processed (thousands ) . . . . . . . . 1,046,740 1,106,054 1,480,066 1,600,748 1,695,980

—Transactional mail . . . . . . . . . . . . . . . . 568,900 610,624 809,632 875,861 928,901

—Press mail . . . . . . . . . . . . . . . . . . . . . . 32,454 35,988 47,988 55,554 59,435

—Parcels . . . . . . . . . . . . . . . . . . . . . . . . 252 284 405 405 421

—Advertising mail . . . . . . . . . . . . . . . . . 445,134 459,159 622,042 668,929 707,224

Total staff . . . . . . . . . . . . . . . . . . . . . . . . . 10,287 11,071 10,312 10,961 11,586

Points of sale (retail):

—Post off ices (ow ned branches) . . . . . . . 624 752 748 783 884

—Postal agencies (partnership branches) . 1,896 1,813 1,814 1,778 2,013

Customers per day at post off ices . . . . . . . . 131,397 140,138 139,724 153,902 166,241

Customers per day per post off ice . . . . . . . . 211 186 187 197 188

Sorting units . . . . . . . . . . . . . . . . . . . . . . . 11 11 11 11 11

Distribution centers . . . . . . . . . . . . . . . . . . 304 330 326 341 353

Express and parcels business unit:

Total items processed (thousands ) . . . . . . . . 18,406 16,901 22,896 23,067 24,377

—Portugal . . . . . . . . . . . . . . . . . . . . . . . 8,728 8,657 11,608 11,896 13,213

—Spain . . . . . . . . . . . . . . . . . . . . . . . . . 9,617 8,171 11,185 11,094 11,134

—Mozambique . . . . . . . . . . . . . . . . . . . . 61 73 103 77 30

Total staff . . . . . . . . . . . . . . . . . . . . . . . . . 1,168 1,178 1,201 1,164 1,182

—Portugal . . . . . . . . . . . . . . . . . . . . . . . 622 660 658 677 725

—Spain . . . . . . . . . . . . . . . . . . . . . . . . . 465 462 480 443 420

—Mozambique . . . . . . . . . . . . . . . . . . . . 81 56 63 44 37

Total branches . . . . . . . . . . . . . . . . . . . . . . 871 1,026 1,018 1,064 1,169

—Portugal (CTT ow ned branches) . . . . . . 624 752 748 783 884

—Spain (CTT ow ned branches and

partnership branches) . . . . . . . . . . . . . 236 264 259 273 279

—Mozambique (CORRE branches) . . . . . 11 10 11 8 6

Total logistics platforms(1) . . . . . . . . . . . . . . 45 45 46 43 44

—Portugal . . . . . . . . . . . . . . . . . . . . . . . 13 14 14 14 13

—Spain . . . . . . . . . . . . . . . . . . . . . . . . . 23 23 23 23 27

—Mozambique . . . . . . . . . . . . . . . . . . . . 9 8 9 6 4

Financial services business unit:

Number of transactions (thousands ) . . . . . . . 69,432 75,744 99,952 104,602 106,719

—Post off ices . . . . . . . . . . . . . . . . . . . . . 31,030 34,603 45,274 48,466 52,816

—Payshop netw ork . . . . . . . . . . . . . . . . . 38,402 41,141 54,678 56,136 53,903

Total staff . . . . . . . . . . . . . . . . . . . . . . . . . 103 111 114 112 116

Total points of sale . . . . . . . . . . . . . . . . . . . 4,533 4,719 4,714 4,777 4,700

—Post off ices . . . . . . . . . . . . . . . . . . . . . 624 752 748 783 884

—Payshop netw ork . . . . . . . . . . . . . . . . . 3,909 3,967 3,966 3,994 3,816

Date post:	01-Mar-2023
Category:	Documents
Upload:	up-pt
View:	0 times
Download:	0 times

The Initial Public Offering of CTT – Correios de Portugal

Documents