Fiche ECM PDF

Preview

Summary

Download Fiche ECM PDF

Description

MSc in Corporate Finance and Banking – Equity Capital Markets

ECM PART 1: Overview of Equity Capital Markets 1. (Exam 2015, 2017) Provide the rationale for a company to execute an IPO  Raising capital / financing company’s growth and development (access to enlarged sources of funds (both in terms of amount and geographical origin)  Allowing for a partial or full exit of existing shareholders  Increasing company’s visibility  Allowing for the use of a share consideration as part of a potential acquisition financing package  Associating employees to the shareholding 2. (Exam 2015, 2017) From the reference shareholder point of view, what is the rationale to go for an IPO?  As a source of liquidity for shareholders, the IPO can be either alternative or complementary to an M&A solution  Sell at IPO: monetise the investment, provide minimum free float  Keep at IPO: keep exposure to the performance (e.g. financial sponsor) 3. (Exam 2015, 2017) From the investor point of view, what are the reasons to invest at IPO?  Benefit from the IPO discount to the value  Invest in the compelling equity story (sustainable growth, strong profitability, financial track record and positive prospects, quality management)  Invest in a new sector / product / geography  Play the consolidation  Other depending on the investor profile (growth, value, GARP, etc.) 4. What do investors expect from an IPO candidate?  Positioning - Market with significant size - Strong market dynamics / good medium term growth prospects - Consolidation / external growth perspectives - Leading position in competitive position - Differentiation factors vs. peers - Clear positioning of investment thesis  Strategy - Good financial and management track record - Clear strategy and goal - Clear explanation of the use of proceeds  Management/shareholding - Quality management with proven track record - Shareholding / management stability - Clear vision on anticipated disposals by shareholders post IPO - Valuation in line with shareholder / market expectations 5. What are the key success factors of an IPO?  Issuer related - Industry/sector attractiveness (growing industry / strong prospects, limited risks on the business model, resistance to the macro-economic context) - Good medium term growth prospects - Margin expansion / rebound - Cash generation prospects - Quality management with proven track record - Clear positioning: growth / value / GARP / yield / M&A - Leading positions - Consolidation / external growth opportunities - External growth track record  Market environment and IPO process related - Supportive secondary market environment - Low volatility regime - Cash available: strong inflows in equity funds - Aftermarket performance (of recent IPOs) 6. (Exam 2015) Explain the mechanism of bookbuilding (type of orders)/final price and allocation of IPO Price range, being cover at a specific price, discretion of the allocations

1 / 25

MSc in Corporate Finance and Banking – Equity Capital Markets

Bookbuilding is a critical step in the IPO process as investors decide how much they will invest. First, the offer is launched at a specific valuation range. The management meets investors (conference call, roadshow or private meeting) who decide on their order size and price limits. Once the investor offer period is over, the lead manager and the issuing company fix the final price of the shares, and the bank will sign a best effort and bought deal agreement that will impact the allocation of the shares: - Best effort: underwriter promises to make a full-fledged attempt to sell as much of shares but no price is guaranteed (for risky shares) - Bought deal / Prise ferme: minimum price guaranteed 7. (Exam 2014 & 2015 & 2016 & 2017) Calculation of right value and TERP (Theoretical Ex-Rights Price) All exams take the Peugeot example with slightly different numbers.

TERP=

n∗P+N∗S ¿ Existing shares∗Cum−rights share price+¿ New shares issued∗Subscription price = n+ N ¿ Existingshares +¿ New shares issued

S −1 TERP Value of rights issue=Ex share price−TERP Discount ¿ TERP=

= P -TERP

Discount ¿ last close /¿ reference price=Facial discount= Parity = New shares subscribed / Existing shares

S −1 P

Adjustment factor=

TERP P

#Shares issued = Parity * #Existing shares

a. (Exam 2014 & 2015) PSA capital is composed of a total of shares of 234,049,344 before the transaction. PSA is launching a rights issue with a parity of 1 new share for every 2 existing. The reference share price of PSA used for the pricing of this rights issue is €14.28 and the subscription price for the new shares has been set at €8.50. Compute the following items: amount of the capital raised, TERP, rights issue, adjustment factor, discount to last close, discount to TERP P (Cum-right share price) €14.28 S (Subscription price) €8.50 Parity 1/2 # existing shares 234,049,344 (234,049,344 * 1/2) # shares issued 117,024,672 Capital raised 994,709,712 (117,024,672 * €8.50) = Shares issued * new share price TERP €12.35 (234,049,344*14.28+994,709,712)/(234,049…+117,024…) Rights issue €1.93 (€14.28 - €12.35) Adjustment factor 0.87 (€12.35/€14.28) Discount to last close (Facial) -40% (S/P – 1) Discount to TERP -31% (S/TERP – 1) b. (Exam 2016) Peugeot issues new shares through a rights issue. Reference price is €14.28, the facial discount is -42.1%, the capital raised €1bn, the market cap. FFP exercises only half of its rights. Shareholding structure EPF FFP Peugeot family Employees Treasury shares Float Total

Number of shares 19,115,760 53,363,574 72,479,334 7,638,100 17,187,450 136,744,460 234,049,344

% of capital 8.17% 22.80% 30.97% 3.26% 7.34% 58.43% 100.00%

1) Compute the # of shares issued, # of total shares post transaction, TERP, value of the right. Facial discount = subscription price / ref price – 1  Subscription price = (Facial discount + 1) * ref price = (-42.1%+1) x 14.28% = €8.27 # new shares issued

= capital raised / subscription price = €1bn / €8.27 = 120.8m

# total shares post transaction

= 234m + 121m = 355m

TERP

= (234m * 14.28 + 121 * €8.27) / 354.8m = €12.23

2 / 25

MSc in Corporate Finance and Banking – Equity Capital Markets

Value of right

= €14.28 - €12.2 = €2.05

2) Compute the discount to TERP Discount to TERP = (subscription price / TERP) – 1 = -30% 3) Compute the new % ownership of FFP post transaction FFP owns 53,363574 shares pre-transaction, and has therefore 53,363574 rights. He exercised half of its rights (26,681,787), so he subscribes to 13,771,245 new shares given the 16/31 parity (26,681,787 * 16/31). # shares pre-transaction # rights # rights exercised (half of rights) # new shares subscribed given 16/31 parity # shares post transaction % ownership

53,363,574 53,363,574 26,681,787 13,771,245 67,134,819 18.9%

1 share = 1 right Parity = 120,946,479 / 234,049,344 13,771,245 + 53,363,574 67,134,819 / 354,995,822.8

4) What is a cash neutral transaction? When a shareholder sells rights in order to finance the exercising of the remaining rights. No cash out. c. (Exam 2015) Right issue / Exercise on TERP Stentys, a medtech company, wants to raise over €35m through a rights issue to finance (i) a clinical study to obtain the approval to market its BMS stent in the USA and (ii) its commercial roll out Stentys’ current share price is 17.02€. We know Stentys will raise 36,364,968€ at a price of 12.00€ 1) What is the theoretical value of the right in the context of this share issue? # shares issued 3,030,414 (36,364,968 / 12) = (Amount issued / Price per share issued) # shares after the rights issue 11,111,523 (8,081,109+3,030,414) = #Existing + #Issued Theoretical ex-rights price €15.65 (3,030,414*12+8,081,109*17,02)/(11,111,523) Theoretical value of the right €1.37 (17.02-15.65) 2) What is the level of discount to TERP? 3) = Subscription price / TERP -1 = S/TERP - 1 = 12 / 15.65 - 1 = -23.3% 4) What is the level of discount to last close (facial discount)? = Subscription price / Previous price -1 = S/P -1 = 12 / 17.02 - 1 = -29.5% 8. (Exam 2014 & 2015) Calculation of a Cash neutral transaction/tail swallow (//7.a) Based on data in question 7, fill in the following chart describing the transaction for a shareholder owning 1m shares before the capital increase and who wants to know the impact of a cash neutral transaction vs. a full subscription. Shareholder initial # of shares n # rights to sell (*) Proceeds from rights sold # rights to be exercised # of new shares subscribed Cost of subscription # shares post transaction Net investment by shareholder (*)    0    

Cash neutral transaction 1,000,000

Full subscription 1,000,000

687,702 1,327,265 (687,702*1.93) 312,298 (1,000,000 - 687,702) 156,149 (312,298 * ½ (parity)) -1,327,265 (=proceeds rights sold) 1,156,149 (156,149 + 1,000,000) 0 (always)

0 (always) 0 (always) 1,000,000 (always) 500,000 (1/2 parity) 4,250,000 (500,000*8.5 = #New shares*S) 1,500,000 (500,000 + 1,000,000) 4,250,000 (=Cost of subscription)

Net investment by shareholder = 0 Proceeds from rights sold – cost of subscription = 0 # rights to sell x value of rights issue - # new shares subscribed x S = 0 # rights to sell x value of rights issue - # of rights subscribed x parity x S = # rights to sell x €1.93 – (1,000,000 - # of rights to sell) x 1/2 x €8.5 = 0 # rights to sell x €1.93 + €4.25 x # rights to sell = 1,000,000 x 4.25 €6.18 x # rights to sell = 4,250,000 # rights to sell = 687,702

#Shares initial = #Rights subscribed + #Rights to sell #Shares subscribed = # Rights subscribed * Parity 3 / 25

MSc in Corporate Finance and Banking – Equity Capital Markets

9. (Exam 2016) QCM a. The accelerated book building process happens during i) trading hours ii) off trading hours iii) over several trading days b. A shareholder holds 15% of a company which raise equity. In which situation will the shareholder more diluted? i) In an €20m rights issue where the shareholder does not exercise his rights ii) In an €20m ABB rights issue, the current shareholders do not exercise their right iii) In an €20m ABB rights issue, the shareholder sells 5% of his stake 10. (Exam 2016) Explain why is there an IPO discount? How is the IPO discount determined? Why? - Reward the investors who move first on this new stock (untested waters). - Maximize the probability for shareholders to subscribe to the rights issue - “Shock absorber” during the length of the subscription period (14d min between the announcement of the transaction vs the end of the subscription period) to manage: market risk and risk related to market perception of the transaction How? 10-15% built into the early valuation; It will be determined according to the amount raised, the context of the transaction, recent stock performance and stock characteristics (liquidity / volatility), market environment, commitments from shareholders to participate in the rights issue

4 / 25

ECM organization

Insider; clients = Banking issuers– /Equity shareholders MSc in Corporate Finance and Capital Markets Coverage

Maintain / Expand client relationship

ECM origination Provide solutions proactively or in response to client requests

Structuring / Execution Structure and execute transactions to bring them in compliance to the market

Public; clients = investors (private/public) Syndication Research Distribution (Sales) Leverage the Research Interface between bank’s coverage and origination follow-up after underwriting and (issuers’ focused) sales distribute equity and distribution transaction placement (investors’’ focused)

IPO: listing of a company; primary (new shares) / secondary shares (shareholders sell a minority stake) Key rationale IPO: Investors are looking for the right story (industry attractiveness), at the right time (market sentiment / volatility), with the right structure (free float / use of proceed / mix primary-secondary / listing location); looking for medium to long-term (+ attractive price) A standard IPO process takes 4 to 6 months between the internal decision to list being made and the effective listing date Calibrate offering structure + Size (Extension clause (allow to continue the contract after its stated expiration date, up to +15% base deal) + Greenshoe (a provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer if the demand for a security issue proves higher than expected, up to +15% after extension clause))

 

Offering size: mix primary/secondary; base deal size (ensure free-float + liquidity post IPO); extension clause; greenshoe clause Offering structure: large success; wider base of investors; solid/LT shareholder base; pricing dynamics, specific population

How will the IPO final price be set? Price sensitivity of the demand; quality of the demand; aftermarket performance Capital increase: Company raises equity by issuing new shares; preferential rights for shareholders (rights issue) or without (Accelerated Bookbuilding (“ABB” = ST, without marketing, no roadshow, offering in 1/2d) / Fully Marketed Offering (“FMO”))

- Rights issue A rights issue is a shareholder friendly transaction A preemptive right (« Droit PrSfSrentiel de Souscription » DPS) is attached to each share held, offering shareholders a priority to subscribe to the rights issue, in the form of tradable security  Several options are offered to shareholders, enabling them to arbitrate between participating in the rights issue5 / 25 or monetizing their dilution The value of the right compensates “apparent” dilution associated to the discount  The higher the discount the higher the theoretical value of the right

MSc in Corporate Finance and Banking – Equity Capital Markets

6 / 25

MSc in Corporate Finance and Banking – Equity Capital Markets

PART 2: Capital structure 4 questions dont 1 QCM– attention les questions sont issues des slides 2014 & 2015, alors qu’un seul des documents a StS prSsentS en classe 1. (Exam 2015) Having in mind the survey of Dirk Brounen, Abe de Jong and Kees Koedijk, please indicate several factors that affect the way CFOs choose the appropriate amount of debt in their firm.  Financial flexibility (in order to have enough internal funds available to pursue new projects when they come along)  Credit rating assigned by rating agencies  Volatility of earnings and cash flows  Tax advantage of interest deductibility  Transaction costs and fees for issuing debt  Debt levels of other firms in the industry  Potential cost of bankruptcy or financial distress  Limiting debt so customers and suppliers are not worried about our firm going out of business  Restrict debt so that profits from projects can fully be captured by shareholders and do not have to be paid out as interests to debt holders  Keeping enough debt to avoid being an attractive takeover target  Personal tax cost our investors when they receive interest income  Issue sufficient debt to make sure that a large portion of the CF is committed to interest payments, ensuring management works hard and efficiently 2. (Exam 2014 & 2015) Capital structure theories Is there really an optimal debt/equity ratio? Firms tradeoff between the debt advantages/disadvantages (tax shield/bankruptcy costs M&M classical in most classical tradeoff theory): tradeoff paradigm Pecking order Firms prefer to finance their activities using internal funds, short term & senior debt (little theory risk, easy covenants), risky debt, bonds and hybrids, equity Market timing Firms try to time the market by using debt when it is cheap and equity when it seems theory cheap Agency theory Firm managers may be tempted to overspend their free cash flow, so high debt is useful to control this overspending impulse. Of course, this increase in leverage does increase the chance of paying deadweight bankruptcy costs. There may also be agency conflicts between debt holders and equity holders In order to insure the willingness of stakeholders, such as employees and business Stakeholder partners to make valuable co-investments, some firms prefer to use little debt when co-investment compared to other firms theory

CFO

CFO

CFO

3. (Exam 2015) In assessing the appropriate level of equity for a firm, you can use a theoretical approach or target a specific rating. Theoretical approaches are not so often used. Please mention 4 difficulties of the WACC approach. By minimizing the WACC, you maximize the enterprise value. However, it is not so easy  Sensitivity to terminal value  How do you compute the WACC? Average WACC versus marginal WACC? Now the debt is very cheap, how do you take into account new debt into the WACC?  Communication (not easy, you need a WACC for impairment tests)  Not commonly used at brokers (compare to multiple for example) 4. (Exam 2014) In a LBO, a financial sponsor uses leverage to boost ROE. Relaxing the assumptions on which M&M original theorem is based, can you explain how financial sponsors can create value, taking advantage of market imperfections? With the same set of assumptions, can you identify other drivers of value in LBOs? En thSorie financière pure, la valeur d’entreprise de Valtin ne va pas dSpendre de sa structure de capital (thSorème de Modigliani-Miller) : si le niveau d’endettement augmente, le risque perçu par les actionnaires comme par les crSanciers va augmenter, et le gain W substituer de la dette (moins chère pour un niveau de risque donnS) sera annulS. NSanmoins, plusieurs imperfections de marchS peuvent conduire W une augmentation de la valeur d’entreprise quand la dette augmente :  Le dSductibilitS des intSrêts de la dette abaisse son coût en deçWZ de sa valeur de marchS  Le coût de marchS la dette peut être en deçWZ de son coût d’Squilibre (cas d’une politique monStaire expansionniste par exemple)  Le risque associS par les investisseurs W la dette dSpend essentiellement de son rating; or, celui-ci prSsente des paliers (AA, A, BBB+ etc.). A l’intSrieur d’une note donnSe, l’endettement peut augmenter sans que le coût de la dette augmente 7 / 25

MSc in Corporate Finance and Banking – Equity Capital Markets

5. What are the pros and cons of a share buyback? A share buyback is the re-acquisition by a company of its own stock. As equity decreases, the leverage increases, which reduces the WACC and increases EV. Pros Cons Better debt/equity mix due to market timing (cost of Risk of a wrong market timing exploitation: management equity vs. cost of debt) often buys back shares when the share price is high when the company has excess cash – they destroy value Negative signal to the market as it shows that Positive signal given to the market: the current share management does not have investment opportunities price is under-priced and does not reflect the future company prospects Discipline and more efficient management as financing is optimised 6. Main steps of acquisition financing a. (Exam 2015 & 2016 & 2017) You are an investment banker and you seed to set up a financing structure for an acquisition. When and why will you use equity? Please describe the main steps of your calculations. Please describe what kind of instruments you use first and at what stage equity comes. b. (Exam 2014) How would you assess the capacity of a corporate to acquire another company? 1. We develop a thorough understanding of its operating and financial constraints through a detailed analysis of its business/financial profiles and of its funding policy 2. We have developed a proprietary financial “merger model”. Based on several assumptions (operational, financial, funding), this model gives us for the buyer, the target and the combined company 3. We compute post transaction financials and cash f...