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Equity

Italy’s capital markets: an engine of growth?

Ask people to name the centres for capital markets in Europe and most will probably pick London, Frankfurt and perhaps Paris. But Milan will not be on many people’s shortlist, at least not outside Italy. But that may be about to change as a series of major transactions on the city’s stock exchange has shone a spotlight on a growing trend that could point to a boost to the eurozone economy’s growth outlook. By Phil Thornton

The past year has seen two major equity transactions that have grabbed the headlines for both their size and significance. In February 2017 investors took up the bulk of a €13.7bn record capital raising by UniCredit, Italy’s largest bank. The first day of its offering saw commitments to take up 99.8% of the rights issue that was launched to repair a restructuring-related shortfall in its capital buffer.

Eight months later, Italian tyre maker Pirelli floated on the Milan stock market in an IPO that valued the veteran Italian industrial company at €6.5bn, and raised about €2.6bn from a sale of 35% of its shares. Although the shares fell 2% on their opening day it was on track to post a gain of 17.9% on its launch price by the end of January.

Thanks to its flotation, Pirelli became the 30th company to join the Italian stock exchange in 2017. Lorenzo Langella, head of ECM Italy and co-head of corporate finance Italy at BNP Paribas, says Pirelli and UniCredit were “landmark transactions” that were smoothly completed with a positive aftermarket performance.

Carsten Hesse, European economist at German bank Berenberg, describes it as an “IPO boom”, saying 2017 was the best year for IPOs in more than a decade.

“The successful Pirelli IPO, the capital raising exercise by UniCredit, as well as more than 30 other IPOs [in 2017] clearly show the advantages of having access to the capital markets,” he says. “The capital raised from shareholders can be used for faster growth of the company or to improve its capital structure.”

While total equity volumes in Italy have jumped by 185% to €23.7bn as of the end of November compared with a year earlier, IPO volumes have soared by 237%, according to figures from UniCredit.

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Analysts say the equity market has benefited from an improved macroeconomic situation in Europe, greater stability in the financial sector as banks repaired their balance sheets, and the realisation by investors that the political outlook had become more stable after the Brexit vote in the UK and the election of Donald Trump in the US.

“The upturn in the market comes from a combination of improved macro conditions, greater political stability, and increased investor appetite for public offerings,” says Stefania Godoli, head of equity capital markets at UniCredit in Milan. “There’s no doubt the market is much healthier than it was three years ago.” 

While Pirelli was a hugely important IPO, many of the companies that had come to market in 2017 had tended to raise €200m-€500m. “The Pirelli deal is a testament to the strength of the market — raising €2.6bn gives you an idea of investors’ appetite,” Godoli says. “However, Pirelli’s listing doesn’t represent a standard Italian IPO — mid-size companies still make up the bulk of the IPO market in Italy.”

These mid-market IPOs included gambling company Gamenet which priced a €72m IPO in December, Gima TT, the tobacco packaging machinery division of IMA which floated for €423m, consumer electronics retailer Unieuro’s €220m IPO, and bad loan specialist doBank which came to market with a €704m valuation.

Langella says the improving macro environment, coupled with the abundant liquidity available in the marketplace, is prompting many listed companies to reconsider strategic options and accelerate growth plans, especially for non-organic growth.

He says M&A is becoming the “name of the game” for many good, listed companies, citing the $3bn acquisition by Prysmian of its US rival General Cable in December 2017. “The equity markets are currently able to serve any equity need,” he says.

“On the other hand, given the strong performance in the equity markets — and correlated implied multiples levels — many private companies are taking off the shelf IPO plans that were previously put on hold.”

Entrepreneurs seek IPOs

Milan’s stock exchange is also promoting itself as a hub for high-end consumer goods after recent listings by fitness equipment company Technogym, as well as fashion brands Brunello Cucinelli and Salvatore Ferragamo.

Many successful mid-market companies in Italy coming to market are family-owned firms where the founding entrepreneur or subsequent generations of the family can no longer pass control of the business down. Italy’s corporate sector is strongly founded on the idea of entrepreneurs who are exceptional and have built their companies over 30 years.

However, there has been a trend of companies looking for managers outside the family who can take the business to market to access capital for growth. “This is a phenomenon we have seen in Italy for the past 10 years or so, but the difference now is the receptivity of the market, and stronger entrepreneur interest in crystallising their value and creating a more diverse shareholder base,” Godoli says.

Another stimulus for family-led small and mid-sized firms to go down the IPO path to raise new capital is that lending has been squeezed during a banking crisis.

The success of companies coming to market in 2017 has laid the groundwork for another positive run of IPOs in the coming year, analysts believe. Godoli says that 2018 is set to start off on the “right foot” in terms of companies’ desire to go to market.

Hesse adds that stronger growth in consumer spending would also encourage another slew of companies to come to the market in 2018. There has been a great deal of speculation about IPOs by a number of companies in the fashion and food sectors. According to local reports these could include Valentino Fashion Group, handbag maker Furla, and Eataly, a restaurant chain.

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He also highlights the implementation of the piani individuali di risparmio (PIR) programme, retail vehicles that offer significant tax advantages for investment in SMEs and which attracted €7.5bn in assets in the first three-quarters of 2017 and underpinned SME investments.

Langella describes the PIR initiative as the “icing on the cake” for listed SMEs that were already benefiting from abundant liquidity, relatively high valuations, good after-market performance and positive investor sentiment towards new offerings.

Away from IPOs, rights issues in the 11 months to November 2017 were up by 201%, mainly thanks to UniCredit. The bank’s rights issue is a sign that Italy’s troubled banking sector is able to use the equity markets to carry out the refinancing needed to plug the holes in their balance sheets. “Several of Italy’s large banks have raised a lot of capital,” says Jack Allen, European economist at independent research house Capital Economics. “Certainly, that is very important for strengthening Italy’s banking sector and its economy more generally.”

ECM ‘invaluable’
boost to economy

One trend particularly among high valuation IPOs is the greater role of national and international institutional investors taking stakes in corporates away from banks that often hold a web of cross-shareholdings and which have been criticised for limiting the scope for risk taking. For instance, Pirelli’s IPO marked the end of a shareholder pact at Mediobanca, the Milanese investment bank, which has been one of Italy’s most significant power brokers.

Hesse says the control of companies by national and international institutional investors tends to improve corporate governance. “It forces the companies to stay focused on day-to-day business and to develop a coherent long-term growth strategy, and constantly improve profitability — which improves their survival chances in a globally competitive market.”

However, he adds that while cross-shareholdings are in general best avoided, in order to improve corporate governance, there are times when they are a positive factor, such as when a cross-shareholding could be a first step to a full merger that could raise significant synergies and make a company more successful.

Langella says that while the unwinding of cross-shareholdings is the clear trend, it is too early to say if it is wholly positive. “The reality is that time will tell if unwinding of cross-shareholdings would mean acceleration in the growth trajectories of the companies involved and in the value creation process for all stakeholders,” he says.

The billion euro question is the extent to which an uptick in the equity and bond markets will feed through to the economy.

Hesse says he sees signs for optimism: “Bond and equity markets are very important for the development of the corporate sector.”

Overall the market cap to GDP ratio is still quite small in Italy, about 40%, but it is rising. Hesse says a strong capital market as well as a slowly improving banking sector will “improve business sentiment and therefore improve GDP growth”.

Godoli says a country with a strong capital market has a way of funding and growing companies, and attracting talent and M&A. The more active the market is, the more companies come to market, then companies become less local and more European and more competitive and more able to attract talent, she says.

“Being listed means you are able to get the best people to work for you. These people create the best companies, leading these companies to become competitive at an international level. In other words, you attract money, you attract talent, and you build a strong future.”

Langella says the equity markets have the potential to provide top class Italian companies with the financing needed to accelerate growth plans. “And that is invaluable when it comes to contribution to the overall economic recovery of the country,” he says.    

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