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Drawing a blank

29 September 2011 By Fiona Maharg-Bravo

Spain’s biggest IPO is out of luck. Loterias y Apuestas del Estado, the state lottery company slated for a 6-9 billion euro sale, has been abruptly pulled. Market conditions were tough, but political pressure and liquidity-starved banks may have dealt decisive blows. Though the cancellation will have only a modest impact on state finances, it will reverberate. And it is shambolic.

If market conditions were the sole reason for pulling the IPO, it should have happened earlier. Euro zone problems have been wreaking havoc on equity markets for months. Even if Loterias proved able to buck the bearishness – and its defensive nature suggested it might – it was clear that the government wasn’t going to get anywhere near the top of the range, price-wise. Yet as recently as Sept. 23, the Spanish cabinet had pledged to go ahead with the deal.

Spain’s domestic banks had issues too. The wholesale funding markets have been shut for weeks, forcing institutions to compete fiercely for deposits by offering high yields. They feared the IPO, half of which was earmarked for retail investors, would cannibalise deposits. Loterias was planning to lure small investors with a dividend equating to yield of between 8 and 9 percent.

Yet this still doesn’t explain the abruptness of the reversal. The deal break appears to have come thanks to pressure put on the ruling socialists from the opposition People’s Party. The centre-right PP is expected to win the November general elections by a wide margin. In the last few days, it accused the ruling socialists of selling a cash cow on the cheap and threatened to examine the deal for possible misuse of public funds – worrying brickbats to throw during an election campaign. The mutterings certainly seem to have spooked the weakened socialists.

Spain is expected to need to borrow 190 billion euros this year. So losing 7 billion from selling the lottery is hardly a game changer. But the Loterias IPO was high profile, making it resonate outside, as well as inside, financial spheres. The eleventh-hour cancellation will not do Spain any favours.


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