When Aegon, the Dutch insurer, sold $1.5 billion in new shares in May, 2001, to fund a U.S. acquisition, it was a no-sweat transaction that wrapped up in a morning. What a difference a year can make. When Morgan Stanley and ABN Amro recently sold $3.4 billion of existing shares to help shore up the insurer's balance sheet, it took two nail-biting days to place Europe's largest stock offering this year.
And Aegon's management was lucky. It didn't have to fire its chief executive or change its strategy, as some companies have done in the course of selling shares. For instance, it was only after struggling Zurich Financial Services Group dumped Chief Executive Rolf Huppi that it could tap shareholders for more money. New CEO James J. Schiro had to promise 4,500 job cuts and a new strategy that focuses on Zurich's core insurance businesses before he could be sure a consortium of banks would underwrite the deal. There are big questions about whether the market is even open to the likes of France Télécom, which wants to raise 15 billion euros to lower its $70 billion debt mountain. "Of course, there is a price for everything," says one London hedge-fund manager, "but there is not a lot of cash around for France Télécom."
Just as a growing number of European companies are desperate for money, they are finding the markets inhospitable. Bankers say a host of European companies are hoping to raise, in total, $40 billion to $50 billion. "There is a large pipeline of [planned issues] by companies wishing to restore their balance sheets," says John Hyman, who heads the capital markets division at Morgan Stanley in London. "Market conditions are very volatile, and companies need to react to market windows when they arise."
Investors are wary of this overhang and choosy about what they buy. "The market is coming down because of all these equity issues," says Marco Ravagli, Milan-based head of equities for Deutsche Bank's DWS Investments. "And the more the market comes down, the more issuers need the capital."
Just a couple of years ago, initial public offerings and other equity offerings were glorious, champagne-drenched occasions. Now, with European indexes down to 1996 levels, selling stock can be an exercise in humiliation. Going to the equity markets is increasingly a painful last resort for cash-strapped companies in the insurance, telecommunications, and other industries that have worn out their welcomes at banks, in the bond markets, and among private investors. There's a silver lining in all this: It's forcing many companies to turn themselves around. But it's a wrenching process.
The insurance industry is leading the equity-issues parade. Insurers' portfolios have been savaged by the fall in equity prices, which in turn is threatening their ability to support the payout in the annuity products so popular in Europe. British insurer Legal & General is in the midst of raising 1.25 billion euros. Swiss Life Insurance & Pension Co. is looking for money, and Royal & Sun Alliance Insurance Group PLC--which recently ousted CEO Bob Mendelson--is scrounging for a lifeline. "We aren't surprised by the number of companies tapping the markets, given the pressure they are under," says acting Royal & Sun Alliance CEO Robert J. Gunn.
Many companies are resorting to an old tactic: employing so-called rights offerings that give existing shareholders the right to buy new stock first. On the Continent, rights issues were considered a relic of a bygone age: As interest in equities surged in Europe, issuers thought they could raise money more efficiently and transparently by going direct to the market rather than through these old clubby arrangements. But that was when there were plenty of buyers around. This year, rights offerings have accounted for about 20% of Europe's new equity volume, up from under 1% last year. "The big advantage of a rights issue is that you avoid dilution and keep existing shareholders happy if you price the shares attractively," says Zurich Financial's Schiro. Offering a big discount to the market price is key. Zurich Financial, for instance, is offering shareholders two new shares for every three they own--at a discount of more than 50% to the market price.
But, generally, investors are being very discriminating with new stock issues. Asset managers and insurers on the Continent, who once could be counted on to take up 30% or more of European offerings, are taking half that now. So big global asset managers, such as Fidelity Investments, have become increasingly important to such placings, as have hedge funds. British institutions continue to be major players, too. Another big factor: individual local investors who may want to protect beleaguered national champions. Swedish investors, for instance, rode to the rescue when telecom giant and hometown hero Ericsson went to the market in July, buying up an estimated 70% of its $3.2 billion rights offering.
Investors show no signs of getting less picky. In fact, some fund managers say they would be wary of a France Télécom offering regardless of how much the current $7.50 price were marked down. "They need a restructuring plan for the debt and a new business plan. That's even more important than price," says Ravagli of DWS.
This persnickety approach is forcing some companies to shape up. It also is helping to clear the remaining excesses from the market. "Investors are so skeptical and critical that what is being brought to the market is priced well," says Matthias Mosler, head of European Equities at Merrill Lynch & Co. in London. "This has contributed to several recent European IPOs outperforming the overall market." That skepticism, together with the demand that share issues come laden with reforms, may yet help lay the foundation for recovery.
|Corrections and Clarifications "Europe's money hunt" (Finance, Oct. 7), gave an incorrect figure for the percentage of new equity issues in Europe last year that were rights offerings. The correct figure is 6%, not 1%.|
By Stanley Reed in London, with David Fairlamb in Frankfurt and Gail Edmondson in Rome