After Missteps, Canceled IPO, Eutelsat Waits for a New Day

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Eutelsat’s decision to cancel its planned billion-dollar initial public offering (IPO) of stock followed a series of missteps and misunderstandings that clouded what should have been the straightforward sale of a healthy and growing company, banking and satellite industry officials said.

Paris-based Eutelsat, the world’s third-largest commercial satellite operator in terms of revenue, will now have to pick up the pieces — and digest millions of dollars in banking fees and commissions that are now lost, leaving the company to contemplate a renewed IPO attempt early in 2006.

“There is no rush to get this done, but Eutelsat management and the sponsors want to go public sooner rather than later,” said a member of Eutelsat’s investment banking team. “It’s easy to say we should have done things differently. I guess we should have.”

This banker agreed that one of the biggest problems that cropped up was the manner in which Eutelsat management, led by Chief Executive Officer Giuliano Berretta, would handle its own Eutelsat stake. The market interpreted Eutelsat’s IPO documentation as an indication that the entire Eutelsat management team was cashing in its shares as part of the IPO. This raised concerns among prospective investors.

In evaluating a company, stock market analysts routinely measure management’s commitment by its ownership of the company’s stock. IPOs often feature lockup clauses prohibiting managers from selling their stock for 12 to 18 months after trading begins — a guarantee to investors that management’s interests are aligned with those of shareholders .

The apparent decision by Eutelsat managers to sell all their shares was highlighted by analysts at investment bank UBS as one reason to be wary of Eutelsat.

Eutelsat spokesman Vanessa O’Connor said the company remains restrained by European stock-market regulations from talking publicly about the IPO, which was withdrawn Oct. 27.

Trading on the Euronext market — where Eutelsat competitor SES Global of Luxembourg also trades — was to have started Oct. 31.

The IPO attempt was managed by Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley. Because of various U.S. and European regulations and their company policies, the bankers declined to speak publicly about what when wrong with the Eutelsat IPO.

But one banker agreed to discuss the operation on condition that the company not be named.

Eutelsat announced its long-expected IPO Sept. 7 in a filing with French stock market authorities.

On Oct. 11, the company announced that its stock would be priced at between 15.25 and 17.75 euros ($18. 40-$21.41 ). In addition to the news shares offered by Eutelsat, the company’s private-equity owners announced they would sell an additional tranche of shares. The total value of the IPO was 1.2 billion euros.

By some measures, the IPO conditions gave a higher value to Eutelsat than to its larger competitor, SES Global.

A two-week period of assembling institutional investors to purchase the stock began. One industry official said a majority of Eutelsat’s bankers had urged a lower introductory price but were told to accept the higher figure or withdraw.

“There are always differences between bankers,” the Eutelsat investment advise r said. “It’s too easy now to say, ‘I was for a lower price.’ We all signed on to this, and we have to say the market found it too high.”

As the days passed, it became clear the IPO was not winning the necessary support of institutional investors. Two officials said the offering had generated only about half the orders needed to complete it.

What is more, the equity markets in the United States and Europe began falling in mid-October on inflation worries.

On Oct. 21, Belgian cable-television operator Telenet conducted an IPO at 21 euros per share. It dropped immediately to 19 euros, then to 17 euros over the next week.

Telenet is not a globally known company and its performance should not have had any bearing on Eutelsat. But it did.

“This was our nightmare scenario,” the Eutelsat investment advise r said. “We all wanted to avoid a disaster like Telenet’s.”

On Oct. 25, Eutelsat announced it would reduce its IPO price to between 12 euros and 13.80 euros. The separate sale of shares by the private-equity companies that own Eutelsat was scrapped.

Eutelsat still hoped the IPO would generate gross proceeds of 860 million euros.

The new price was within the range of what UBS — one of the few banks whose research analysis on Eutelsat was publicly circulating — had said was a reasonable range.

But the changed price did not dispel concerns that Eutelsat management was cashing in its stake.

“Eutelsat executives intend to sell all their 0.9 million shares in the IPO,” the UBS research report said, adding that after the sale Eutelsat management would own only warrants that could be purchased up to August 2015.

The Eutelsat investment advise r said this impression was wrong. “The message was not as bad as it looked,” the advise r said. “In fact, the warrants that management was subscribing to were equivalent to 77 percent of its pre-IPO ownership stake. So the reduction was only 23 percent. The [private-equity] sponsors were selling one-quarter of their investment, and the feeling was that management should be allowed to do the same.”

After the price reduction, Eutelsat’s investment managers were able to find takers for the full value of the IPO. Two industry officials said the issue was only slightly oversubscribed, meaning demand for the shares once they started public trading was in doubt.

“It was not a large oversubscription but it is factually correct to say it was oversubscribed,” the Eutelsat investment advise r said.

Meanwhile, the equity markets’ late-October tumbles did not let up.

On Oct. 27, Eutelsat announced it was canceling the IPO. SES Global shares rose despite the overall market downturn, apparently because of the publicity given to the satellite sector during the Eutelsat IPO.

The week of Oct. 31 — when Eutelsat was to have begun trading — the markets rebounded, raising the question of whether Eutelsat and its bankers fell victim to an unjustified case of failed nerves.

“It does look that way in hindsight, but we had the Telenet experience that we all wanted to avoid,” the Eutelsat investment advise r said. “If shares fall on the first day of trading, it can take months or years for a stock to recover. Eutelsat’s owners did not want to take that chance. When you’re sitting there staring at what amounted almost to a Black Thursday [Oct. 27, when the broader stock market was particularly weak], you cannot be the one to push the green button. We have a good story with Eutelsat and it will be for another day.”