UK Edition
Investors drive hard bargain after IPO market failed its test
Bargain hunters aren’t just buying products from retailers this week. As consumers gear up for the Black Friday shopping frenzy, the investor community has decided to drive some hard bargains of its own.
More money was raised through initial public offerings (IPOs) in Europe during October than any other month this year, according to data provider Dealogic, but the shopping spree has left many feeling disappointed after investor expectations didn't match the reality.
"The market was tested and it didn't pass," one London-based IPO banker said. "Investors are now just extremely sceptical that the pricing of each deal is right."
Take Bakkavor, the UK’s leading producer of hummus, as an example. The ready meal supplier announced a £1.2bn London listing last month, then ditched its plans due to "market volatility" before deciding a week later to go public after all – at a much cheaper price.
This demand for a discount wasn't forecast six weeks ago, when a medley of firms unveiled plans to go public across Europe. The burst of activity caused a big sigh of relief among the bankers, investors and chief executives concerned that Brexit had done long-term damage to Britain's IPO market. But things didn't quite go to plan.
For a start some of the biggest floats expected in London – from debt collector Cabot Credit Management, mobile mast provider Arqiva and business outsourcer TMF Group – ditched their IPOs either for a better offer or no deal at all. Bakkavor set the bar by pulling its plans before returning at a lower price.
Many of those that did go ahead last month also didn't perform as well as hoped. Russian energy group En+ and auto parts maker TI Fluid Systems, which both listed in London, are trading below the prices at which they floated. In Europe, French fashion house SMCP, Spanish housebuilder Aedas Homes and Austrian bank Bawag Group are also below their opening price.
Just as some Black Friday deals might not be as good as they first seem, investors are now bargaining hard to make sure they don't get stung with more bad offers. Companies pulling their plans might be pinning the blame on market conditions, but the real problem rests with the price tag.
"Bakkavor is a good example where it did blame market conditions, but market conditions a week later were exactly the same," said Sue Noffke, UK equities fund manager at Schroders. "What changed was the price. For most investors, everything has a price. It's getting that price point right."
Another ingredient now needed to get a deal over the line is a big investor, with sources saying that Singapore sovereign wealth fund GIC's backing of US energy group ContourGlobal was key for that IPO to get away earlier this month. It is flat on its stock market debut.
"Everyone knew that they were coming into the situation, there were a couple of really big supporters that know their stuff and did a lot of due diligence, who don't generally invest in cr-p," one senior banker said. "It derisks the situation for everyone."
But the right price tag and a big cheerleader still doesn't guarantee that an IPO will happen. Denmark's largest mortgage lender Nykredit, which has been working up to a float since February 2016, pulled its plans earlier this month in favour of a sale to a group of pension companies, weeks after TMF Group ditched its UK listing plans after getting a better offer from private equity firm CVC.
"The IPO option has been at a structural disadvantage for a while," said KPMG's head of UK equity capital markets, Marco Schwartz. "Over the last few years, debt has been very cheap. This has allowed companies to find very inexpensive financing and therefore defer IPOs. It has also meant that private equity funds have access to more and cheaper firepower to buy assets. Again this has meant that IPOs have been deferred."
While the tendency for businesses to ditch a listing for a sale is nothing new, pressure on advisers is rising ahead of Brexit as the window to do a deal closes in. Ms Noffke said UK IPO activity will be front-loaded to the spring and pre-summer next year, with boards wanting to steer well clear of March 2019.
"There's definitely the March 2019 issue which will probably cloud investor appetite," she said. "[However] it's very easy to blame everything on Brexit. The quality of IPOs have probably been a bit weaker than traditionally the case. There's been ones with more issues around debt or governance, or racy valuations and a mix of old and new technologies."
With the IPO window forecast to be small next year, the performance of those first few listings in the new year will likely dictate activity for the rest of 2018. And those that are willing to jump in first, with the right price tag attached, could be rewarded the most.
"February or March is the time we'd look for the money," said Adam Young, head of equity advisory at Rothschild. "If you [IPO] in February or March, you're coming early. Early bird catches the worm."