Translated material
Authority at a discount
Societe Generale raised twice as much money as it planned
The French bank Societe Generale, as a result of an additional issue of securities in favor of its own shareholders, attracted almost twice as much funds as it expected. The amount of 10.2 billion euros made up for losses suffered by the bank due to the actions of trader Jerome Kerviel and unsuccessful financial transactions in connection with the mortgage crisis. According to analysts, the success is explained by the proposed price of the securities, which is approximately 40% lower than the market price. At the same time, the trust placed in the bank by its largest shareholders increases hopes that the bank will be able to avoid a takeover by competitors.The capital increase operation became necessary because the credit institution suffered losses of 7.5 billion euros in the 2007 financial year, of which 4.9 billion euros were lost as a result of futures transactions carried out by the bank's trader Jerome Kerviel. However, despite losses in the trading and investment banking sectors, the bank ended the year with a small profit.
Societe Generale expected that the placement of shares would bring it 5.5 billion euros, but the result exceeded this level by 1.85 times and amounted to 10.2 billion euros, or $15.5 billion. Societe Generale granted existing shareholders the right to purchase shares at a preferential rate price. The transaction scheme assumes that for every four “old” shares one “new” one could be purchased at a price of 47.5 euros. At the same time, at the moment the market value of the bank’s shares is about 65.5 euros. Thus, the discount was approximately 40%. Against the backdrop of the results of the additional issue, SocGen shares rose on the Paris Exchange by 2.1%, to 65.42 euros.
“Most of Societe Generale's largest shareholders signed up for the paper, and only a few sold their options,” said Emannuel Gerolt, head of European securities at investment bank Morgan Stanley, which led the offering. -- The proposed price suited the current shareholders who trust Societe Generale's strategy. The amount raised of 10.2 billion euros is quite significant for any financial institution in the current market conditions.”
Some analysts believe that rumors about a possible takeover of the bank contributed to high demand. The largest bank in France, BNP Paribas, has long been trying to establish control over its competitor. And on February 29, a report appeared in the French press that BNP Paribas was awaiting permission from the French authorities to make an offer to acquire Societe Generale. Investors reacted optimistically to these rumors, and SocGen shares jumped 1.9% that day.
However, on the other hand, it is a successful placement that can allow the affected bank to avoid takeover. Societe Generale executive chairman Daniel Bouton yesterday once again said that he intends to continue to manage the bank as an independent company. “The success of this operation will allow Societe Generale to continue to develop in areas and regions with high potential,” he said.
Thanks to the successful placement, Mr. Bouton justified the confidence placed in him by the board of directors, which retained him in his post, despite billions in losses and criticism from top government officials. As you know, French President Nicolas Sarkozy has repeatedly expressed outrage at the situation surrounding the bank. “I don’t understand the situation at Societe Generale,” he said at the end of February. “It’s not normal when the head of a company that has experienced such a large-scale disaster is not responsible for what happened. The fact that he receives 7 million euros a year does not shock me, but only if he fulfills his duties. And this is exactly the problem of Daniel Bouton.”
It is not surprising that the bank's management, being in a nervous state, played it safe and set a very low placement price. And this, as analysts note, ensured success. “If it hadn’t worked out, it would have been a huge blow to the bank’s management, but they set the price so low that success was practically guaranteed,” said Pierre Flabbe, an analyst at investment bank Landsbanki Kepler. “It’s obvious that they decided to protect themselves from the slightest risk of failure.”