September 29, 2011 / 12:04 PM / in 6 years

Spain pulls lottery IPO on political, market factors

MADRID (Reuters) - Spain’s ruling Socialists abruptly shelved plans to boost public coffers by selling part of the lucrative state lottery, in the face of tough market conditions, political opposition and banks’ funding concerns.

Bookbuilding was supposed to begin on Friday on the public offering of 30 percent of Loterias, which could have raised up to 9 billion euros (US$12 billion), but the deal was fiercely opposed by the center-right People’s Party (PP), which opinion polls show winning a November general election.

Loterias, or LAE, known for the Christmas “El Gordo” draw, is the jewel in the crown of Spain’s remaining state-owned assets. It has the largest prize fund of any lottery in the world, last year paying a total of 2.3 billion euros.

The sale was going to be Spain’s biggest IPO ever, and one of the largest in Europe, as the nation fights its corner of the euro zone debt crisis.

“The decision to pull the IPO was due to a combination of factors, although the background was political,” David Bach, Professor of Strategy and Economic Environment, IE Business School said.

Sources said Spanish banks involved in the sale saw Loterias as a direct rival in their need to bolster capital, by enticing Spaniards to withdraw bank deposits to invest in lottery share.

“I know for a fact that pressure from the banks involved is the reason behind this decision. The banks need capital to shore up their balance sheets and Loterias was direct competition. It would have attracted investors who would otherwise have opened deposits which the banks badly need,” said a fund manager at one of Spain’s largest institutions.

Up to now, Madrid has consistently met or even exceeded expectations with austerity measures to drag it out of its debt mire. Investors have seized on signs of political weakness in the past but the dropped IPO did not upset Spain’s debt markets, which were more concerned with broader euro zone events.

The premium investors demand to hold Spanish over German debt stood at 307 basis points on Thursday afternoon, narrowing slightly from a day earlier.

“I don’t think its a disaster for Spain and it was probably the right decision for the government to postpone it. If it had sold off Loterias at a much lower price than expected, then this would have added grist to the mill of the PP’s election campaign,” Bach said.


The Economy Ministry said it canceled the sale because price expectations would not be met due to declines in global equities markets. Previously the government had said it would forge ahead with the sale because the lottery was a unique asset with a high value even in turbulent times.

“The lead managers said they were not sure that we could get the price that they and the government believe it is worth,” Economy Minister Elena Salgado told state radio.

But one banking source said the indicative price range being discussed up until late Wednesday was not at the bottom end of expectations. The company has been valued at 21-25 billion euros.

The PP, which is widely expected to intensify austerity measures and economic reforms if it comes into power as expected, has long been opposed to the sale.

“Selling this valuable asset is ridiculous, short-term thinking. It’s like selling the family’s luxury Aston Martin car for 2,000 euros to pay off a tiny amount of the mortgage,” said Jaime Garcia Legaz, PP Deputy and general secretary of conservative thinktank Faes in a recent interview with Reuters.

In recent days, PP leaders ramped up threats to block the sale, accusing the Socialists of selling off Loterias for too low a price.

The government’s 2011 budget had included income of up to 7 billion from the sale. A source close to Loterias earlier said the range expected for the sale was 6-9 billion euros.

David Schnautz, analyst at Commerzbank, said a recent official presentation explicitly stated the IPO would not affect Spain’s funding requirements.

“We expect Spain to sell 20 billion to 25 billion euros of bonds in the fourth quarter. Obviously we would have lowered that figure had the IPO gone ahead, but it means the Treasury can keep up their planned issuance for the year. They won’t need to beef it up or change maturities, just stick to the original plan,” he said.

Spain’s borrowing costs have soared since its deficit far exceeded European Union limits in 2009 and the euro zone debt crisis stoked fears the government may not be able to bring its budget back to sustainable levels.

“The attractiveness of LAE as an investment has not been in doubt I would say. It’s a cash cow, debt free and was going to pay out 95 percent of earnings as dividend,” said a leading U.S. fund manager based in London.

Alvaro Martinez, manager at Cartesio investment fund in Madrid, noted that the sale had been controversial given the battle to balance public accounts; regular and stable lottery revenue is a prized asset in cash-strapped times.

The Treasury last year netted 2.9 billion euros from the lottery, a treasured Spanish institution.

“Loterias is the best business the Spanish state has. We buy it every week and will continue to do so, especially at Christmas,” said 80-year-old Juan Caballero, as he and his 74-year-old brother Julian had their shoes shined in Madrid on Thursday.

Additional reporting By Paul Day, Carlos Ruano and Nigel Davies, editing by Fiona Ortiz and Mike Peacock

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