By Mauro Spadaro and Dario Spinelli
Introduction
On April 27th 2007, the IPO of Prysmian group was completed. The transaction offered 27 million shares at a final price of €15 per share. At first sight this information can seem of little relevance, as it can be perceived as a standard IPO transaction. However, the deal involves interesting considerations and consequences for the industry if considered as part of a greater project that stands in the middle between the worlds of Private Equity and Investment Banking (in particular the ECM side). Therefore, before proceeding with an in-depth analysis, it is important to add some context that will make comprehension of the project and its different phases easier.
The start of a journey
When back in January 2005 Pirelli Group, Italy’s historical tyre manufacturer, had set the deadline in two weeks’ time for first-round offers for a majority stake in its cables unit, many caught the opportunity straightaway. Main industrial competitors were left aside. Pirelli Cables & Systems was a too big fish to be caught, while leveraged private equity investments were in their golden age in Italy. During those times, Pirelli was systematically trying to refocus its business after years of having a foot in both camps – cables and tires. It was time for the Italian multinational group led by Marco Tronchetti Provera, to strategically reorganise selling its grown sub-division producing cables and wires, focusing on the production of tyres and expand internationally, heading towards east.
After a flurry of interest, six non-binding offers for the business were finalised. Among those bids, three entered in the final round of discussions: Goldman Sachs Capital Partners, Texas Pacific Group and Bain Capital. Negotiations were tough and centred around the amount of debt used to finance the acquisition. As minutes included in “The Prysmian Story, Building the Nerves of the World” by Markus Venzin outline, Valerio Battista, CEO of Prysmian and former Head of Pirelli’s Cables & Systems Unit, recalled: “I needed to decide whether I wanted to go. I told Goldman ‘Over 5x the leverage… I will not join the NewCo’ – and they agreed.”
The dawn of Prysmian
On June 2nd 2005 it was announced that Pirelli had sold its cable-making unit to Goldman Sachs Capital Partners buyout fund for €1.3 billion, including €690 million in debt. A few months later, the new company was renamed “Prysmian Cables and Systems”, in a move that signalled a complete reorganisation of the newly born enterprise. Debt was one of the major concerns, as half of the deal value had been financed with borrowed funds. Battista recalls: “So the goal was just cash, cash, cash… nothing else. People could have sold even their mother… everything that mattered was bringing home the money […]”. Fortunately for Prysmian, the business, also thanks to the economic recovery in 2004, was accelerating. The manufacturing leadership of the firm in cables all around the world guaranteed constant and abundant cash flows that in the end allowed the group to repay the debt binge in record time.
From the other side of the deal, the transaction represented an opportunity but also a gamble as everything had to be built from scratch. Business fundamentals were strong, but the management needed to be adequately trained and reorganised. Furthermore, completely buying the business as it happened with Prysmian was not Goldman’s style of doing things; they had usually preferred to invest alongside their clients and advisors, contributing with minority stakes. Goldman’s expertise helped to grow the business and to decide on important matters. For instance, Prysmian from “Prysm” – a beautiful geometric shape that splits and reflect light – was finally chosen as the new brand name, conveying the idea of being constant innovators with a solid knowledge and expertise in the cables industry.
Due to the “debt incentive”, a growing market for cables and wires and strategic acquisitions during the period 2005-2007, Prysmian managed to cement its market leadership position. Pushed by its achievements, going from milestone to milestone, the group was navigating towards its next goal: the IPO and the birth of the first Italian public company with no controlling shareholder.
The IPO of Prysmian
The next crucial step of the deal for Goldman Sachs regarded the exit strategy. Having been able to timely repay the debt used to finance the acquisition, the best option on the table, after completing the reorganisation, was proceeding with an IPO. Therefore, we will now shift our attention to this stage, highlighting the main process and details of the transaction.
The syndicate
The IPO process was mainly run by three banks as Joint Global Coordinators: Goldman Sachs, JP Morgan (“JPM”) and Mediobanca. In addition, Goldman Sachs and Mediobanca acted as Joint Bookrunner and managed 80% of the entire underwriting. Moreover, Mediobanca served also as “Responsabile del Collocamento” with respect to a pool of 25 banks which took care of the so called “Italian Retail Offering” that represented 20% of the underwriting.
In order to understand why JPM did not act also as Bookrunner, it is important to understand the reasons of its participation and highlight the relevance of the bookrunner position. In fact, JPM was chosen not only because of its expertise and relevance but also to guarantee the independence of the group of global coordinators. As a matter of fact, a deal completely managed just by Goldman would have sparked fears of conflict of interests among investors, undermining the solidity of the transaction. Moreover, we must also consider that the role of the bookrunner is a highly sought-after one, as the transaction is included in the ECM League Table of an Investment Bank. Therefore, GS and Mediobanca preferred to offer to JPM higher fees for the bank to not act also as bookrunner. Eventually, four banks operated as Co-Lead managers: ABN AMRO, Banca Aletti, Banca Caboto and BNP Paribas.
Equity story
Storytelling is one of the most important elements in an IPO process that characterises both the pre-launch and the execution phases. In particular, investors come into contact with the “Equity Story” during the so-called “Pre-Marketing” phase. During this stage, which usually takes place one week before the announcement of the price range and the offering size, investors are given the opportunity to better understand the company and its history, while coordinators use it to gauge preliminary demand and the price range as well as position themselves for the imminent roadshow.
Thanks to its leadership position, its strong growth trend and fundamentals (margin and profitability), the high level of diversification and its solid management, Prysmian Group was received well by the group of investors, who had shown only minor concerns regarding business’ cyclicality.
Pricing of the IPO
Thanks to an extremely effective storytelling, the initial roadshow phases went smoothly and an initial price range between €13.25 and €16.75 was set, implying an EV/EBITDA multiple range of 6.7x-8.1x against a sector average of 8.1x. As a matter of fact, in the first 5 days of the roadshow, the deal size was already covered and at the end of the process the total demand amounted to 316 million shares (against a deal size of 72 million).
However, such momentum was just partly exploited, because caution was preferred. The final price was set at €15, thus following a more conservative and less risky approach, with the idea of ensuring a stable aftermarket. Eventually, in order to guarantee stability, a greenshoe option consisting in a 15% over-allotment was sold to coordinators.
Transitioning away
After the initial sale to the market, Goldman Sachs performed two additional offerings with the purpose of further divesting its equity stake in the company.
On November 6th 2007, only seven months after the IPO, Goldman Sachs acted as Sole Bookrunner in an Accelerated Book-building Offering (henceforth “ABO”) which placed 22 million secondary shares, mainly owned by GS itself, at a price of €19.35 (0.56% discount to market) raising €429 million. It is important to notice that in the months following the IPO the market price of Prysmian stabilised at a value almost 30% higher than the IPO price.
On November 10th 2009, after the global financial crisis, another ABO was performed. The transaction offered 26 million shares at a price of €12 per share, raising €312 million. It is important to notice that this time, in order to make the offering more appealing, the price was set at a considerably higher discount to market of approximately 8%. Thanks to this last transaction, Goldman Sachs further divested its equity stake in Prysmian, decreasing from 31.2% to 16.8% of the share capital.
The final step of the journey, which had begun in 2005, was the liquidation of the remaining 16.8% stake. This happened in March 2010. The offering was covered quickly with orders reaching two to three times subscription and the remaining 30.4 million shares were mainly sold to institutional investors except for 1.5 million shares, sold to Prysmian Chief Executive Valerio Battista. Though, such final divestiture did not come easily. In 2010, major discussions among board participants were connected to the future of Prysmian. Would it be better to sell the remaining equity stake to a strategic investor, or go fully public, resulting in no controlling shareholder? Pier Francesco Facchini, Prysmian CFO recalled: “Because I realised that being a public company was a unique concept in Italy […] My view, knowing the shareholders and financial market pretty well, was that this would have been hugely appreciated in an environment like Italy.” And indeed it was. Even though an increased amount of shares floating would have logically depressed the share price, that did not happen. Institutional investors appreciated that Prysmian was a public company and priced its corporate governance model with a premium – a model which prevailed until today.
Deal legacy
As Goldman transitioned out of the business, Prysmian became the first completely public Italian company with no controlling shareholder that traded on the Milan Stock Exchange. A success story marking an important milestone and resulting in two different inheritances.
The first one was the success of the buyout, notwithstanding the 2008 economic crisis. As hinted before, Prysmian was the first example of an Italian public company with no controlling shareholder. It all started as a divestiture of Pirelli’s Cables & Systems division and resulted in a leading manufacturing company, able to compete on a world scale, with an organisational and managerial structure able to support its businesses’ growth.
The second one was the reputational legacy for Goldman Sachs, as Prysmian represented both an opportunity and a gamble for the bank. The success of the IPO was just the icing on the cake in a deal that had been carefully studied and engineered. The transaction, however, was not free of risks, as the degree of leverage used to buyout the business was significant and the economic crisis of 2009 threatened the balance sheets’ soundness. Also, the deal was far from what Goldman had achieved in the past, as it was one of the few instances where a bank completely bought an entire business. The successful IPO fostered their global reputation not just as leading financial advisors but also as growth investors, having tripled the price they had paid in 2005 within just two years.
Eventually, Prysmian’s story also reflects the importance of the Private Equity industry in creating value for companies and stakeholders. On one hand the strong expertise of management and its attention to expenses (crucial when repaying the high debt level) and on the other the financial expertise of the bank guaranteed the success of the transaction. Prysmian, since its inception, grew to the global market leader for cables and wires, representing an exemplary match of value for all market constituencies. Here, perhaps the most important takeaway from this deal is the importance of working synergically together as well as combining competences and skills in order to achieve growth and value creation for all market constituencies.
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References:
https://hu.prysmiangroup.com/sites/default/files/atoms/files/PrysmianGroup_10-years-book.pdf
https://it.prysmiangroup.com/sites/default/files/atoms/files/Prysmian_x_24Ore28-4_0.pdf
Prysmian IPO Prospectus
Zephyr Database
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