20 march 2008 eugene belin managing director, head of ficc, citi russia, cis and israel

Capital Markets Case Study20 March 2008Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel

Who are we?

What We Do

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Focus

MONEY¥ $ £ €

Healthcare + Pharmaceuticals

Financial Sponsors

Financial Institutions

¥ $ £ €

Bankers with a Market / Product Focus

Primary + Secondary

MarketActivity

Banks

Capital Raising Options

Fixed Income Equities

Commercial Paper

Loans Bonds EquityEquity Linked

Equity Derivatives

Low Risk High Risk

Capital Markets

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

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


–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


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 (%

)


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


– 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



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


Credit Ratings: Baa2/BBB+

Loan Price: Libor+200bps

Share Price: €3


Credit Ratings: Baa2/BBB+


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 (%

)


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


– 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



Slowdown in economy raised credit concerns



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


Credit Ratings: Baa2/BBB-


Share Price: €4-6


Credit Ratings: Baa2/BBB-


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 (%

)


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 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 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


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


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

20 march 2008 eugene belin managing director, head of ficc, citi russia, cis and israel

Documents

market decline

aa2aaloan price

bn frndue

bond price performance

bpskpn market data

belgium kpn

a3aloan price

market high ma activity