deal of the month
What sNewS Issue 9* September 1998 1
The dient:
KLM Royal Dutch Airlines
ssisting in the withdrawal of the
State as a common shareholder in KLM
The Nethertands' Jan Bausch
(MCT infrastructure, transport logistics),
Wilfried Mulder and Henk Groeneveld
(structured finance), André de la Combé (local
credit analysis). Jan van Veenendaal and Cees
van Dijk (fiscal), Jaap Zwierenberg (legal)
Like many Dutch companies, KLM
Royal Dutch Airlines found itself flush
with a large surplus of cash at the middle
of this year. Although this was a welcome
jresult of buoyant world aviation markets
Wnd the company's own far-reaching drive
to improve operating effi
ciency, KLM was anxious
to reduce its excess liquid-
ity and to enable its ordi-
nary shareholders to
benefit from the current
success by increasing the
profit per common share.
share re-acquisition scheme should
preserve intact the integrity of KLM's
special air-political role as a 'designated
carrier.' This arcane term, common in
the lexicon of world trade regulation,
implies that KLM, as a national carrier
whose ownership is more than 25
percent Dutch, will continue to be the
primary beneficiary of any bilateral
government agreements over flights
and/or airport landing slots to and from
foreign destinations.
To preserve this special status, a complex
transaction was required. First, KLM
revised its articles of association in order
to convert the State's common shares into
a special new class of so-called cumulative
preference Shares-C (or cumprefs-C). The
employee pension fund's participarion
KLM turned to RI for
help in engineering a far-
reaching equity
reacquisition scheme. This
program effectively
eliminated the Dutch state
as a holder of KLM
common shares (i.e. those
which are traded on the
tpen market). It also saw
LM re-acquire all of its outstanding
participation certificates, which were a
special form of equity hitherto held by
its employee pension fund, and brought
Rabobank on board as an important
long-term investor in KLM. In total, the
deal was worth some NLG 984 million.
It reduced the total number of openly
traded shares by 18 percent and thus had
the immediate result of improving
common shareholders' profit per share.
'KLM is now rated on a level with
competitors like British Airways and
Lufthansa on global financial markets,'
KLM's managing director Rob
Abrahamsen remarked after the deal.
'KLM will still have ample liquidity as
well as a very strong balance sheet.'
^he State's partial withdrawal as a KL.M
shareholder is consistent with its strategie
industrial-political policy goals. However,
both the government and KLM were
anxious to insure that the design of any
The sky's the limit for (left to right)
Henk Groeneveld, Cees van Dijk, Jan Bausch,
Wilfried Mulder and Jaap Zwierenberg (missing
from the picture are André de la Combé and
Jan van Veenendaal).
certificates were simultaneously converted
to cumprefs-C as well. For this, both the
State and the employees were paid
according to predetermined formulae. The
new cumprefs-C were then transferred to
a special foundation, Stichting
Luchtvaartbelangen Nederland (SLN)
whose express purpose is to safeguard
strategie Dutch aviation interests. As a
result of this operation, the foundation
holds an 11.7 percent voting right in
KLM. The State, which still holds some
11.75 million preference shares-A, will
thus see its formal shareholding dechne
from 25 to 14 percent; however, it retains
a pro forma option to take majority
control if extraordinary air-political
considerations intervene.
Meanwhile, as KLM's relationship
banker, we structured an arrangement
under which we acquired certificates for
each of the SLN's cumprefs-C - at their
equal value of NLG 5 - and in the
process effectively became an I 1.7
percent strategie shareholder in the
airline. The airline's choice of Rabobank
over other financial institutions was
motivated by our unique cooperative
structure - and specifically our Dutch
roots. This ownership structure stands in
marked contrast to that of our
competitors, whose shares tend to be
more widely dispersed in the
international markets. Furthermore, our
management and structured finance
capabiIities in handling such a
transaction also played an important
role. 'This arrangement assured KLM of
a solid Dutch
partner as a long
term investor,'
explains Jan
Bausch, senior vice
president who
heads the market
core team (MCT)
infrastructure,
transport
logistics. 'In this
respect, it is similar
to arrangements
that we have with
other Dutch
companies such as
the steelmaker
Hoogovens, the
chemicals group
DSM, and the copy machine
manufacturer Océ.' Bausch considers the
KLM deal important for several reasons.
First and foremost, of course, it helped
an important cliënt achieve all of its
strategie objectives. The company
reduced its liquidity, improved
shareholder value, and thus heightened
its profile on the financial markets.
For our own part, the deal involved
intense cooperation between product- and
market-specialists, and marks an
important success for the MCT concept. It
also further cements our relationship with
an important strategie cliënt, delivers a
relatively high net yield investment - due
in part to the tax-free dividends from the
cumprefs-C allowed under the Dutch
government's fiscal 'participation
exemption' - and contributes heavily to
our profile as a reliable financial partner
with acknowledged expertise in the
corporate market.
