Tecnost International
Everyone doubted whether the lead managers would be able to persuade equity holders in Telecom Italia, subject of a takeover bid from Italian communications company Olivetti, to accept the floating-rate bond that Olivetti’s takeover vehicle Tecnost offered as part payment for the Telecom Italia shares.

Few market observers thought the equity holders would then hold on to the bonds even if they did accept them.

But the enthusiasm of Telecom Italia shareholders for the bond issue surprised lead managers and fund managers alike. The three lead managers managed to achieve a take-up rate of 52.1% of the Tecnost offer, which meant cash, equity in Olivetti, and €9.4 billion in bonds – still the largest corporate bond issue ever in the world. What’s more, the majority of equity holders who accepted the deal kept the bonds, handing them over to the fixed-income fund managers at their own firms.

The lead managers then managed to sell €6.25 billion in five- and 10-year fixed-rate bonds, issued to take advantage of the pent-up demand from investors which the issue had created. When the Telecom Italia equity holders held on to the bonds, these investors were left disappointed.

Marco Figus, managing director in debt capital markets at co-lead manager Lehmans in London, says he is personally proudest of the €9.4 billion floater because of the “enormous complications”. The bond issue was being marketed to equity investors. This meant he had to explain to around 200 institutional investors the basics of bonds, including how to analyse the fair value of a bond properly. The key point was to persuade them that the bond wasn’t overpriced and its value wouldn’t fall immediately after the issue. In this the lead managers were so successful that the fixed-income investors they lined up were able to buy precious few bonds until the fixed-rate issue was floated.

The deals proved that European companies could sell massive issues without having to go to the US, with all the inconvenience and expense of dollar issuance. They “convinced people that you really could do things that you could not do before”, says Figus.