Belgacom Case Study

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Belgacom Case

Question 1
a) Why did the share price of Belgacom increase following the announcement of the acquisition? b) Why did the ratings of Belgacom drop (S&P) or put on negative watch (Moody’s)? a) As Belgacom secured the purchase of the remaining 25% share of Proximus it did not own yet, the share price of the Belgian company increased by 0.92 % the same day and 9.8% over the following month. An announcement can lead to pre-event abnormal returns as markets react to this information to get a premium. Investors will try to assess the increase in expected earnings and dividends. The impact of this assessment will depend on how the merger is done, how the transaction is paid, the sector it concerns, etc. However, according to market efficiency theories, overreaction on stock prices tend to disappear in the long-run and the price reflects the present value of expected returns. (FAMA, 1998) That being said, several reasons may explain this jump. First, we can underline the fact that this operation enables Belgacom to collect all the benefits of Proximus. Before the purchase, 25% of the earnings of Proximus were placed in minority interests, these were payable to Vodafone. After the operation, Belgacom owns 100% of the shares and can enter all the cash of its subsidiary in its accounts. It represents an increase of the future cash flow not only for the firm but also for its current shareholders, which will be comforted to receive more in the future or that their shares represent more cash. This is due to the decision of Belgacom to finance its acquisition by debt which doesn’t give ownership rights to the bond owners.

Fig. 1: Evolution of Belgacom Share Price (2005-2008)

Second, Belgacom was familiar with Proximus business as Belgacom (75%) founded the company with Airtouch (25%) in 1994, creating by this way the first mobile phone operator in Belgium.

b) Unlike the market, rating agencies did not welcome positively this transaction: Moody’s changed its outlook to negative and Standard&Poors downgraded Belgacom rating to A from A+. Moody’s explained that it keeps Belgacom’s rating unchanged because according its methodology designed for GRI (Government-Related Issues), there is no change in Belgacom solvability. Moody’s GRI methodology use three inputs: the rating and the outlook of Belgium, the low level of default dependence and the medium level of support from the Belgian government. While there is no change in those inputs, there should be no change in Belgacom rating. That being said, several indicators lead the agency to wonder about the ability of the Belgian company to deal with its creditors. First, Belgacom announced a bunch of outflows for the months to come: just at the same time, Belgacom decided to sell its 5,8% stake in Neuf Cegestel to SFR: the outcome of the operation was EUR 187 million plus a share buyback (maximum 200 million) and a dividend in 2006 for EUR 100 million. Futhermore, Belgacom decision to use its current financial stability and therefore weaken its debt ratios.

As for Standard&Poors, the agency decided to downgrade the rating of the Belgian firm from A+ to A. S&P said this decision lies on the fact that the Belgacom debt will rise of about EUR 2 billion, making notably increase the debt/Ebitda ratio from 0,8 to 1,9. Moreover, its business in a competitive and liberalized market, as well as the decline of fixed lines market make fear for future results of the company. However, the outlook remains stable, that can be explained by the strong position of the company on the Belgian telecom market and its huge ability to generate cash.

Question 2
a) Why was the acquisition financed by a bridge loan?
b) What were the alternative financing sources?

a) Bridge loans are short-term financial instruments usually used to lock-in a settled price( (frequent in Real Estate Market). This practice buys time for the deal maker to sort things out and to better...
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