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Loterias y Apuestas del Estado, which is expected to raise at least 7 billion euros from a 30% stake sale and rival Glencore as the biggest listing this year, is to pay its bookrunners less than 1% of that total, prior to a possible incentive fee, two sources close to the deal said.
Several other sources confirmed the fees were very low but would not be drawn on the exact level. A spokesman for Loterias declined to comment.
The average fee paid to bookrunners on European privatizations since 2000 was 1.9%, according to Thomson Reuters/Freeman Consulting data. That contrasts with an average of around 3% for all European floats during that period.
The data shows that issuers bringing large deals to market have greater power to squeeze fee percentages, as the absolute sum is higher and banks are keen to gain league table credit.
"The base fee is relatively tight," said one source close to the Loterias deal. "It is a huge deal size so you have got that league table pressure. Everyone wants to be in it and they have made the most of that situation."
BBVA, Credit Suisse, Goldman Sachs, JP Morgan, Santander and UBS are global co-ordinators, while Citi, Deutsche Bank and Morgan Stanley are joint bookrunners.
The Loterias fee is still low compared to other large deals. The average paid on initial public offerings (IPOs) of more than $1 billion since 2000 was 2.1%, although this has fallen from around 2.1% pre-crisis to 1.7% this year.
Bookrunners on the $10 billion float of commodities trader Glencore shared a base fee of 1.75%.
Although European equity fundraising is up year-on-year so far in 2011, boosted by several bumper rights issues and Glencore's listing, on the whole IPOs have disappointed. Investor sentiment has been hit by months of market volatility, with the Japanese earthquake, unrest in the Arab world and sovereign debt worries forcing more than 20 firms to pull European IPOs and leaving bankers scrabbling for business.
LICENCE TO PRINT MONEY
The fact the cash-strapped Spanish state does not want to be accused of overpaying is also adding to downward pressure.
"The government cannot be seen to be too generous in these times of austerity. But Loterias is an easy sell both to the banks and investors," said one Madrid-based banker.
It is not just the banks who are receiving little for their role, with advisers Rothschild ROT.UL and PR firm Eurocofin also having had to curb their earnings expectations. Sources said it was made clear to PR firms pitching for the mandate that the financial element of their bid would hold a lot of weight.
But despite its desire to keep a tight hold on the purse strings, sources said the government did not push the fees as low as it could have as it was also keen to maintain an image of quality in the running of the sale.
Those involved say they are willing to receive low fees because of the attraction of being part of such a high profile, prestigious deal - set to be Spain's largest ever IPO and the jewel in the crown of the government's privatization program.
Despite the volatile markets, Loterias, which is due to make its debut around October 18-20, is also perceived as a relatively low risk transaction.
It is offering a high dividend yield and is expected to attract good demand from both retail buyers, who have been earmarked around 60% of the listing, as well as domestic and international institutional investors.
Described by many as a "cash cow," Loterias, whose small branded stores on street corners are as much a part of Spanish town life as the newspaper kiosk or neighborhood cafe, made a profit of 3 billion euros in 2009, up 3.5% on the previous year despite the economic downturn.
In contrast, Spanish savings bank Bankia, which raised 3.1 billion euros from listing in choppy markets in July, was seen as much more risky and a test of the success of reforms of Spain's troubled financial system as a whole.
Already deeply discounted, it had to slash its price at the eleventh hour and relied heavily on domestic investors.
"(Loterias) is a license to print money," said one of the sources. "We wouldn't have accepted this fee on Bankia."