Olivetti plans $20.03 bn issue

"If it becomes possible to place corporate issues of this size, not only do we have a far more liquid and grown-up market than we thought we did, we also have a new tool available to European firms seeking to acquire and merge with their rivals," said John Butler, chief markets strategist at Dresdner Bank AG inFrankfurt.

European companies traditionally have financed themselves with bank loans. But the creation of a common European currency and low yields on government securities is enabling companies to tap a vast new source of funds: bond investors. So far this year, private corporations have issued the equivalent of $ 44.5 billion in euro-denominated bonds in international markets, up from $ 11.6 billion in the 12 currencies that make up the euro for the same period in 1998, according to Capital Data Ltd.

The new bonds are five-year floating-rate notes, which will yield 1.85 percentage points over the three-month European Interbank Offered Rate, which major banks in Europe charge one another for loans. The bonds can be called after three years. They will be issued by Tecnost International NV, an international financing subsidiary of Tecnost SpA, the investment vehicle Olivetti is using for the takeover. Tecnost International’s main assets will be interest-bearing funds that finance other entities in theOlivetti group.

The bond issue is dependent on the success of Olivetti’s bid for Telecom Italia. If there is no acquisition, there will be no bonds. Monday, Olivetti named a syndicate of banks that are committed to maintaining a two-way market in the bonds to permit investors to buy and sell the securities. The syndicate includes Lehman Brothers Holding Inc; Chase Manhattan Corp; Mediobanca SpA; Donaldson, Lufkin & Jenrette Inc; and Barclays Bank PLC’s Barclays Capital.

The first four are also Olivetti’s advisers for the hostile bid, while Barclays is a leading underwriter of floating-rate notes for European issuers. In a news release, Olivetti said additional banks will be appointed in coming days. Beginning Monday, Olivetti and the banks embarked on a marketing effort that will include presentations to investors in Frankfurt, Munich, Amsterdam, Milan, London and Paris.

"It’s going to be an interesting test for the bond market," said Martin Reeves, a credit analyst at Alliance Capital Ltd in London."We haven’t really seen something of this size before." Others were more skeptical. Some investors were concerned about the holding-company structure behind the securities; others — noting that companies such as Parmalat Finanziaria SpA had sold bonds but in relatively small amounts — questioned the market’s appetite for Italian corporate securities; still others were concerned about the lack of clarity in Italian bankruptcy law.

Some investors also had concerns about so-called flow-back — that investors would quickly dump the new securities, flooding the market with them and diminishing their value. Others worried that Olivetti’s bank borrowings also would have to be refinanced in the bond market. Refuting these and other concerns, Marco Figus, a managing director in debt-capital markets at Lehman Brothers, said the dozen or so major bans that will be in the syndicate will "provide liquidity to investors who wish to trade these bonds" and that the bond issue would probably be smaller than many investorsfeared. That’s because not all Telecom Italia shareholders will tender their shares.

Jenkins of Barclays acknowledged flow-back was the great unknown. But Figus contended that instead of dumping the bonds on the market, equity managers in institutions would sell the bonds to their fixed-income counterparts in the same firm. Meanwhile, Telecom Italia said first-quarter operating profit rose 10.1 per cent to 3.16 trillion lire ($1.76 billion) compared with a year earlier. Revenue grew 7.6 per cent to 11.9 trillion lire. The company attributed its earnings growth to the solid performance of its fixed-line business and to the strong growth in its mobile-phone business.