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Saturday, 21 October 2017

Privatisation hibernation

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KfW last sold Deutsche Telekom shares a decade ago and has not completed any privatisation work for over three years – yet ECM bankers are not optimistic for a revival any time soon.

April marks a surprising anniversary – 10 years since KfW sold any shares in Deutsche Telekom.

Since 1997, the development bank has been in charge of selling the German state’s shares in Deutsche Telekom and Deutsche Post. Yet even as equity markets have gained ground in recent years, the jumbo equity sales for which KfW is known have been absent.

As an entity independent of the state it has been able to focus on providing the best return for the taxpayer, free from political pressure to sell at certain junctures. This has led to extended periods of inactivity – notably following the two companies’ IPOs in 2000. KfW’s first post-IPO sale in Post was in December 2003, while it waited until October 2004 to sell any more of Telekom.

KfW did in fact try to sell some more of Telekom through an exchangeable bond issued in 2008. However, the bond failed to convert by maturity in June 2013, with shares trading below the €13.4366 conversion price. This begs the question as to why KfW has not been keen to sell with shares now trading €2 above that conversion price.

While exchangeable bonds have failed as part of the privatisation process for DT – the 2013 bonds were to refinance an earlier bond that had not converted – they have been more successful for Post, where KfW has clearly been happier with the valuation, selling far more recently. Equity was sold in September 2012, while outstanding bonds exchanged into stock in 2013. However, the €750m exchangeable that matured in 2014 failed to convert.

Yet the inactivity is surprising considering the performance of both stocks.

KfW last sold Deutsche Post shares in September 2012, raising over €900m. The deal was not a clear success, with pricing revised during the evening bookbuild from a minimum €15.70 to final pricing of €15.40. The stock has traded above this level since late 2012 and doubled by April 2015 to a close of €31.08. Shares have been volatile in 2016 but now trade above €25.

The last sale in Deutsche Telekom in 2006 was not a capital markets transaction but a private sale to Blackstone raising €2.68bn. The hope was that this may lead to private equity interest in the state’s holdings, but within the year, shares fell to €10 from an investment at €14 per share. They eventually recovered, though not before Blackstone had reduced its stake, and are now holding above €16.

At present levels, KfW’s 17.5% holding in Deutsche Post is valued at €12.7bn, but a further 14.3% is held directly by the republic (shares are transferred to KfW prior to sale), taking the entire stake up to around €23bn. KfW holds all of the state’s Post shares and its 21% stake is worth €6.5bn.

Bankers are hesitant to talk publicly about KfW for fear of upsetting the agency, while KfW itself declined to comment on equity sales at this point in time.

However, bankers privately suggest that a major reason for the inactivity is that KfW has a major funding programme.

Bankers all point to KfW’s extremely heavy financing requirement at nearly €80bn in 2015 as a reason not to focus on the few billion that can be raised, with a little more fuss, through equity markets.

An official at another state-owned entity echoed this view, adding that if there is not the political imperative then there are unlikely to be sales.

In 2015, KfW raised €62.6bn through international debt issuance at a rate of more than three bonds per week in 14 currencies. Its target for 2016 will be even more exhausting at €70bn–€75bn.

Nonetheless, all parties are cautious about predicting future behaviour, knowing that the phone could ring without any notice.

But elections mean action may be limited. One originator felt that the local elections this year would stop deals launching, but another said national elections would be a block next year, so local elections could be ignored.

Without the need, then, bankers may have to get through another year in the absence of their biggest client. Which makes the speculation of one senior banker particularly juicy: “Tax revenues have been so good that there were no gaps in the budget that a sale may fill, but refugee costs are now in the billions, so there could be a reason to sell to raise specific proceeds.”

KfW raised €1.5bn in January to build accommodation for 150,000 refugees, with all the proceeds already committed.

To see the digital version of this special report, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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