The Privatization of Rh??ne-Poulenc, 1993 Essay Example

ownership not especially attractive.

Bankers Trust (BT) is known as an innovative firm and participation in this deal will not only provide additional income for the company but also increase its name recognition and develop its brand, which can lead to future contracts. However, the firm should take the lack of precedents and the undeveloped market into account as possible risk factors. In January 1993, the state initiated a partial privatization of RP (20%), offering 2. 58 million shares to the company's employees. The Tresor granted workers only a modest preference of a 10% discount off the share price.

To incentivize employees RP gave them an additional 15% discount and the right to make payment for the stock in twelve monthly installments. Despite these efforts, only 75% of shares allotted to employees were sold, and only 20% of employees participated in the privatization. The unsold 25% of the stock create additional unplanned costs for the firm. Altogether the company wants to sell 8. 8 million shares to employees. Thus it can be concluded that if no changes are made, RP will fail to achieve this plan.

The deal should be made more attractive and should be better explained to employees; they have to understand the transaction in itself as well as the potential benefits and risks. Additionally, it is better to offer different opportunities for them to engage in. An opportunity to pay in 33 equal monthly installments is by construction an annuity. Since yields for every month are not available, we compute a weighted average yield for the period of 33 months (6. 85%). We assume a horizon of 5 years

and that no shares are sold during this period.

Another assumption is that dividend per share equals Ffr 3 (see footnote 11 in the case), an employee purchases 50 shares and that “Not paid on free shares until the end of three years” means that that first dividend is received in the end of year 4. According to our calculations the least costly financing option is to pay in 33 equal monthly installments for A1 or 2. The Present value is Ffr 5454,73. The results are summarized in the Table 1(see Appendix), concluding that A1 is the most profitable for employees.

BT proposed the following: employees would be offered shares at a 20% discount from the public offer price of 150Ffr per share. For each share purchased with the employee’s own funds, a French bank would lend them funds to purchase nine additional shares (up to 500 shares total). Employees would then place all ten shares in the bank’s custody as collateral for the loan. Employees would be prohibited from selling the shares for 4. 5 years except under unusual circumstances. The loan could be repaid at the end of 4. years either from the employee’s pocket or through sale of the shares. BT would guarantee employees a minimum of 1. 25 times the money employees put up to purchase the shares. In exchange for this guarantee, BT would take 1/3 of any price appreciation at the end of 4. 5 years over the public offer price of 150Ffr per share. In terms of financial contracts this would be a combination of options (employees’ option to sell stock after 4. 5years) and futures

(BT’s obligation to pay 1. 25 times employees’ personal contribution).

This alternative seems to be fair for employees in the case of price depreciation, because they will have a secure profit. If shares appreciate, they will earn 33. 7% of return per share less than in A1, but will also earn it on a higher amount of shares. Therefore, it is important which effect prevails. Moreover, with BT’s proposal employees lose share ownership, unless they decide to pay with their own resources. The deal corresponds to the needs of the French government and RP because this alternative seems to be attractive for the employees and they will be motivated to buy all shares.

Bankers Trust ensures that neither the French government nor RP will experience losses, so they will be hold a hedged position. This deal is expected to receive an extensive publicity and, therefore, BT will support its reputation as an innovator in derivative-based risk-management products and gain more name recognition. As its income BT will take 33. 7% of stock appreciation at the end of the resale ban over the initial price of 150FFr per share. There is a risk of depreciation and so BT should hedge payoff of this call options by selling exchange-traded calls or buying put options.

The company’s management should accept the option offered by BT because this alternative meets all requirements of the ideal offering provided by RP. BT is supposed to distribute the marketing material among employees and the proposal seems to be highly attractive with a guaranteed return and opportunity not to repay loan from the own resources. The provided offer minimizes possible

costs for RT if employees do not buy all shares and also no free shares are to be distributed.