European IPOs. Issues of confidence?

Three hard-up governments prepare share sales

THE French, German and Italian governments are all short of money. A mark of how desperate they are to plug their budget deficits is their determination to float state-owned assets in the next two weeks, despite the nervousness of stockmarkets.

Having dithered once before, the French state will float 35% of Snecma, a maker of aircraft engines of which it owns 97%, at the end of next week. Deutsche Post, majority-owned by the German government, is due to sell just under half of its banking subsidiary, Postbank, on June 21st. And through Enel, the state electricity company, the Italian government is selling half of Terna, the owner of the national power grid. In all three initial public offerings (IPOs) of shares, the state will retain effective control - a point not lost on potential investors who so far seem less than enthusiastic about buying the shares.

Snecma's sale is particularly awkward. International investors are wary of a company whose majority owner likes to push its firms to do things that it thinks are in the national interest but make little business sense. Nicolas Sarkozy, the newish finance minister, recently suggested that Areva, a profitable, state-run maker of nuclear reactors, should merge with Alstom, a bust engineering group, to help make the former jewel of French industry, manufacturer of the country's high-speed TGV trains, solvent and keep it in French hands.

Even at home enthusiasm is muted. According to a recent study by TNS Sofres, a French pollster, almost two-thirds of current owners of equity do not think this is a good moment to float a state-owned company. Only a quarter said they were ready to buy newly issued shares. Moreover, Snecma, which sells most of its wares in American dollars, has been struggling with the strength of the euro. And a large number of its employees are members of France's militant trade unions.

Accordingly, the price range set for Snecma shares is much lower than originally intended. The state now values the company at €4.2 billion-4.7 billion ($5.2 billion-5.8 billion), not the €5 billion-6 billion mooted a few months ago. In fact, the IPO was nearly pulled on June 3rd, the day before book-building started. A firm price is due to be fixed on June 17th and trading on the Paris bourse to start the next day.

Snecma is meant to be a curtain-raiser for further possible sales. The state still owns 50.1% of France Telecom. It could sell another slice of Air France and put up for sale Autoroutes du Sud de la France, a toll-road operator. Another candidate is Aeroports de Paris, which runs the capital's airports, but its planned flotation looks less certain after the recent collapse of a new showcase terminal at Charles de Gaulle airport, which killed four people.

In Germany, there were two small IPOs last month after a two-year gap, but three other mooted flotations have been postponed. It now falls to Postbank, which hopes to haul in €2.6 billion-3.0 billion, to rejuvenate the German equity market. However, institutional investors consider the price range ambitious: the issue's success now depends on retail buyers. And the waters were muddied last month when Deutsche Bank, one of the issue's lead managers, pondered buying the bank itself before apparently finding it too dear. Postbank is reputed to have the biggest and best retail-banking operation in Germany, but most of its 11m account holders are unlikely to want the additional, fancy services touted as a source of Postbank's future growth.

As in France, this IPO is meant to be the first in a series. Hans Eichel, the German finance minister, once planned to raise over €10 billion this year from privatisations if market conditions allowed. It seems he will have to wait until next year for most of it. Likely sales, at some point, include more of the government's stakes in Deutsche Telekom and Deutsche Post, shares in four airports, including Frankfurt and Munich, and a lot of property. Deutsche Bahn, the national railway company, was being groomed for an IPO next year, but even that now looks too soon.

In Italy Enel, 60% state-owned, will sell half of Terna, its national-grid subsidiary, through a share offering from June 14th to 18th. The government is hoping to swell state coffers by perhaps €1.3 billion. Again, it seems the seller will have to rely on retail interest to get the deal away.

“We want a large base of small shareholders,” says Fulvio Conti, the company's chairman and Enel's chief financial officer. At least one-third of the shares being sold will be allocated to the retail market. “The tariff system for Italy's grid guarantees our income, and we will have an attractive dividend policy,” says Mr Conti.

The risk is that savers will hear Terna and think Enel, which the government floated in November 1999, selling about one-third of the power company's stock in a deal that attracted around 4m investors and almost €17 billion. At the time Mr Conti was shocked that the government decided to sell, at the top end of the price range, more than 30% of Enel, instead of the 20% originally planned. Enel's shares have languished and are now worth around one-fifth less than at flotation. Mr Conti hopes that Terna's shares will be viewed less like Enel's shares than its bonds, which were traditionally part of every widow's and orphan's portfolio. A power grid with price guarantees should provide a bond-like income stream.

All three governments are keen to raise cash but reluctant to cede control. With the politics in the background, this does not bode well for Europe's equity markets.

• Primary Source