BAML's European ECM team

BAML's European ECM team (left to right) Aukse Jurkute, Craig Coben, Rupert Hume-Kendall and Oliver Holbourn

Bank of America Merrill Lynch's European ECM team has had a strong start to 2011, built chiefly around its successful 'compressed bookbuild to refloat an asset' – or Cobra – for BC Partners' Turkish retail business.

The equity capital markets (ECM) in Europe are a bit of a curate’s egg at the moment. If you’re a big blue-chip company, no problem. For mid-caps, things can be alarmingly unpredictable, as more than one would-be listing has discovered. Yet the Europe, Middle East and Africa (EMEA) ECM team at Bank of America Merrill Lynch (BAML) has been assiduously tracking down liquidity for mid-market deals out of emerging Europe and has even coined a new structure for reducing market exposure risk – Cobra. More of that later.

BAML has one of the smaller European ECM teams among the big banking names, but few can match the relentless persistence that keeps getting it into the biggest deals, securing its place at or near the top of the tables. No one within the respective banks seems to have had an easy ride since Merrill Lynch was bought by Bank of America in 2008 but, while there have been comings and goings in various parts of the empire, the European equity team has remained pretty solid.

“A lot of observers of our bank have run headlines about significant staff turnover,” says Rupert Hume-Kendall, BAML’s chairman of global capital markets. “But we have held this team together through the crunch and, in everything we do best, a lot has to do with its consistency.”

Regions of opportunity

Moving down the market cap scale, the bank sees three regional buckets of activity and opportunity – Russia, the Middle East and Turkey. “Emerging markets have become accepted as a core part of any portfolio, much more so than in 2005 or 2006,” says Craig Coben, BAML head of EMEA ECM.

“Decoupling was prematurely written off, but investors have now accepted the emerging markets convergence thesis – over time. And that enables us to do transactions we would not have been able to do two or three years ago.”

One of these was a singular deal for private equity house BC Partners, which owned a 98% stake in Migros Ticaret, Turkey’s largest retailer. Started in the 1950s as a joint venture with Migros of Switzerland, the company listed in 1991, before becoming the subject of Turkey’s largest ever leveraged buyout in 2008. The buyer was a syndicate that included BC Partners, which subsequently bought out all the minorities. Well, all the minorities except 2%; Turkey has no squeeze-out rule allowing successful bidders to mop up outstanding pockets of shares.

The Merrill Lynch team (now, in essence, the BAML team) had advised BC Partners on the acquisition of its original stake, and also when it took Migros (almost) private. It was well-acquainted with the Turkish retail scene, having co-led the initial public offering (IPO) of BIM, a 'pile-‘em-high-sell-‘em-cheap' Turkish retail chain, in 2005, raising $214m. In January this year it led the $248m IPO of Bizim, a Turkish cash-and-carry chain, Europe’s first primary listing of 2011, in which no new shares were issued but which was three times covered.

Retail stocks

The underlying story was familiar to emerging markets specialists and appealing to more general investors – retail stocks are the front-line beneficiaries of rising Turkish affluence and consumer-led growth. Then discussions with BC Partners began to turn to the outstanding splinter holding in Migros and what might be the next step.

“Bizim was the catalyst,” says Aukse Jurkute, BAML’s head of central and eastern Europe, the Middle East and Africa ECM. “It achieved a very good valuation – 24.5 times prospective earnings – and gave us good intelligence on which investors were interested in Turkish retail.”

There was always the possibility of launching a full-on IPO-type exercise. “But that would have required research, lawyers, prospectus, roadshow – and four weeks of market risk,” Mr Coben points out. “A long process would have distracted management from the day-to-day running of the business. So we came up with a structure which allowed us to do an accelerated bookbuild by leveraging off the company’s existing investor relations structure.”

This was Cobra, otherwise known as 'compressed bookbuild to refloat an asset'. On one level, it was a standard accelerated bookbuild with a catchy name. What made it different was that no one had ever carried out an undocumented, accelerated trade on a company with such a negligible legacy free float. JPMorgan, another of the few big banks to cover Turkish retail, joined BAML as joint bookrunner and, after two days of pre-sounding, the bookbuild took place over two days in early April. “It needed a lot of liquidity and enthusiasm to pull it off, and we knew that we would need two days,” says Mr Coben.

Strength of demand

The liquidity was there and the strength of demand allowed the deal to be upsized by about 20%. As a result, the Migros free float was increased to just short of 20%. The shares were priced at Tl25 ($16.28), a 23% discount to the closing price on the day, or 15.4 times prospective earnings, raising Tl775m. Given that the sponsor acquired its original stake at Tl21.85, it was probably right not to have gone for too much more. But now its asset has better liquidity and a more diversified investor base, which should be of benefit when it finally decides to exit.

“The success of the deal shocked a lot of people,” says Mr Coben. “It was only because Turkey is becoming a mainstream market, more like France, Germany or Italy, that we were able to do it.”

Can Cobra travel? Mr Coben thinks so, pointing out that there are other companies, some under family control, for example, that are nervous about IPO market risk. Russian companies, he adds, often have very small free floats. And Russia is a market of particular interest to BAML.

“Russia will be one of the biggest equity markets in the world in the next 50 years,” says Mr Hume-Kendall. “The disparity in market cap between Moscow and New York is much too wide.” In February, BAML was joint global coordinator and bookrunner with VTB Capital on the first privatisation out of Russia since Vladimir Putin became prime minister in 2008. The Russian state sold down another 10% of its stake in VTB Bank, raising $3.3bn and taking the free float from 14.5% to 24.5%.

“There was an interesting debate on distribution, and whether to do a private placement with a sovereign wealth fund or other investors,” says Mr Hume-Kendall. “After significant work with global investors, a number of institutional buyers materialised and price sensitivities led us to recommend wider distribution.” In spite of the fact that three Russian IPOs were pulled during the roadshow, the deal was priced at a mere 0.3% discount to the last trade and included cornerstone investors from the Middle East and Asia.

Equity essential

Mr Hume-Kendall has always been an articulate champion of equity and not, you sense, just because it is his job. He likes to point out that companies can exist without debt but not, realistically, without equity. That has very positive implications for investment banks. “In bull markets, companies like to issue equity,” he says. “And in bear markets they have to.”

Right now, ECM is schizophrenically exhibiting symptoms of both, as the tail of one cycle overlaps the start of the other. The Glencore IPO, on which BAML is among the bookrunners, is clearly a bullish phenomenon. Bank recapitalisations, such as Danske Bank’s recent $3.8bn rights issue, solely underwritten at launch by BAML, mark the final stage in the recovery of the financial sector.

“There has been a bit of everything in 2011,” Mr Coben agrees, adding that acquisition finance is now returning to the scene. The time may not yet be right for private equity exits determined to extract top dollar. “But we feel fairly confident about the rest of the year, although you need to be nimble in approaching the opportunities.”

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