Companies rush to list as US regains its taste for Europe

The first half of 2014 has proved a great time for European companies to float on the stockmarket.

Investors’ appetite for equity has returned at last, and the IPO market has boomed. Money is flowing into equities in Europe from debt funds, from the US and to a lesser extent from the emerging markets. 

Drawn by this burgeoning demand for shares, issuers across the market have brought to life often long-cherished plans to list. The quickest issuers out of the gates have been private equity firms seeking to exit long-held investments in companies, many of them dating from before the financial crisis. 

With more than $36bn of issuance clocked up in 2014 before the end of June, the EMEA IPO market is the busiest it has been since before the financial crisis. At the same point in 2013, only $8bn of IPOs had been completed, and there were only $31bn of deals in the whole of last year. 

“The theme of the hunt for yield continues to fuel the equity capital markets, particularly on the back of continuing record low interest rates,” says Jens Voss, global head of equity capital markets at Commerzbank in Frankfurt. “It’s been no surprise that the private equity funds have looked to take the window of opportunity and come to the market whenever it’s open and attractive.” 

But while exits by private equity firms made up the vast majority of IPOs in Europe last year, 2014 has presented a wider range of corporate issuers with the opportunity to fulfil their plans to bring in public shareholders.

“While there have been many corporates coming to market, these and privatisation deals take longer to come to market,” says Luis Vaz Pinto, global head of equity capital markets at Société Générale. “There are more boxes to tick. So corporates may be more cautious about coming to market than financial sponsors, which see an available opportunity and jump in. Financial sponsors have been a very strong driver of the IPO boom we’ve had.”

Europe’s surge of equity capital markets activity has not been confined to any particular sector or region. As the eurozone economy has begun to turn the corner out of recession, investors have been increasingly interested in peripheral European stocks as a way of tapping into the recovery, and these make up several of the biggest listings.

The five largest IPOs completed in EMEA this year have been for Altice, the French telecoms investment group that controls Numericable ($1.5bn in January); ISS, the Danish cleaning services group (Dkr9.4bn in March); Irish property company Kennedy Wilson (£931m in February); Applus, the Spanish testing and certification business (€1.2bn in May); and Russian hypermarket chain Lenta ($974m in February).

But while the outlook for the European IPO market is as strong as it has been for years, there are some clouds on the horizon. 

Although the bid for European IPOs from US investors remains strong — the book for a £1.08bn IPO from UK store chain B&M Value Retail was dominated by American accounts — the rate of inflows from the US to EMEA has slowed. 

“The valuation gap between the US and Europe was particularly apparent last year, and though there is still a gap this year it has significantly closed,” says Vaz Pinto. “But though the trend has moderated, it hasn’t come to an end. There’s still strong appetite from US investors for European equities, but it seems to be less now than last year or even at the beginning of this year.” 

As the rate of inflows into the European market has fallen, a growing number of investors find themselves fully stocked with EMEA paper. Increasingly, accounts presented with IPO propositions have to decide whether to move out of an existing investment to participate in the new deal. And although IPOs are still being completed successfully, this change has had a subtle effect on the terms issuers have been able to achieve.

“In the first three months of the year, most large European IPOs over $150m priced at the top end of the range,” says Vaz Pinto. “Since April, most have tended to price at the middle or bottom end of the range. It’s not that there’s less appetite, but investors have become selective as they’ve had fewer funds to invest.” 

And while less cash is available, investors have more options open to them in the European equity capital markets. After six years when IPO activity was flat on its back, companies have jumped at the opportunity to list. 

The macro-economic volatility of the past few years has taught companies that they need to grab issuance windows when they are available. Next year will be dotted with general elections in the UK, Spain, Finland and Poland, while on September 18 this year, Scots will vote on whether to leave the UK. 

This has led many issuers to choose the same timetables for their IPOs, so that many deals are coming to market at the same time. 

“The decision to launch an IPO is never one taken lightly and the gestation period can last four or five months,” says Vaz Pinto. “But the market has been closed for so long that there have been many companies that wanted to IPO but couldn’t. So when the markets reopened, a lot of them decided to launch, and that’s why we’ve seen such strong issuance.”

At times, so many IPOs can arrive at once that account managers simply haven’t enough time to attend every roadshow presentation or process every deal that comes their way. 

Some deals are extensively marketed before the intention to float has even been announced, in an effort by bankers to avoid the heavy traffic in the primary markets during the standard two weeks plus two weeks processing period. 

And while the number of IPOs has rocketed this year, that is not all investors have to contend with. Invitations to participate in secondary deals such as capital raisings and block trades have also flooded in. 

Across Europe, financial institutions have turned to the equity markets for billions of euros of recapitalisations, in preparation for the European Central Bank’s Asset Quality Review later in 2014. The four main Greek banks have taken almost €10bn of capital out of the market.

With so much liquid paper available in the secondary market, investors have had plenty of attractive opportunities open to them that need less time and effort than analysing a new corporate IPO prospect. 

“There’s plenty of liquidity in the market, but there’s also billions of dollars worth of paper coming to market — not just IPOs, but rights issues such as the large bank refinancings and block trades too,” says Voss.  “All of this supply will not be taken up easily. With so much paper on offer in these deals, the markets have to be selective as investors just don’t have time to look at everything at once.”

The post-listing performance of some IPOs this year may also have put investors off the primary market. Many companies’ stock prices have soared post-issue — Altice’s shares have risen 86%, while Moncler, the French-Italian skiing jackets maker, has climbed around 20% since its December listing — this performance has not been replicated across the market. 

AO World, the UK online appliance retailer, has seen its stock fall from a listing price of 285p in February to 262p. Just Eat, the takeaways provider, is trading around 249p, below its April issue price of 260p.  

These lacklustre post-pricing performances, combined with the sheer number of IPOs in the market, have had an impact on the prospects for companies now looking to list. Several deals at various stages of bookbuilding have been pulled in 2014 as investor demand has failed to meet issuers’ expectations.

As issuers piled into the market in June to try to complete IPOs before the European summer break, three offerings were cancelled in a single week. Hungarian budget airline Wizz Air pulled its IPO after some of its peers issued profit warnings, healthcare firm BBI Diagnostics cancelled its transaction because of disappointing valuations and Norwegian oil and gas company Norcap Offshore cited insufficient demand from investors as the reason for cancelling its planned Oslo listing.

Bankers suggested that these smaller cap issuers might have been unsuccessful as their names were unfamiliar to the US funds that make or break many European deals. 

But while there have been failures, they have not had a wider impact on the market or on their sectors. UK clothing chain Fat Face pulled its planned IPO at the end of May after the poor performance of other transactions from the UK retail sector such as Card Factory, Poundland and Pets at Home. 

But on the very same morning that Fat Face cancelled, B&M Value Retail announced its intention to float in a transaction that ended up pricing slightly above the middle of its proposed pricing range. Since then, the shares have traded up almost 6% on the London Stock Exchange. 

It is this resilience of the market that has convinced bankers of its fundamental strength.

“The IPO market in Europe continues to be in good health,” says Commerzbank’s Voss. “There’s no sign of slowing down or of fatigue, and the only cancellations we’ve seen have been down to the specifics of the deals themselves.” 

Société Générale’s Vaz Pinto agrees that the market is the most buoyant it has been for years. 

“This is not only the busiest but also the healthiest market we’ve seen since 2007,” he says. “There’s been such a wide range of issuers with deals from a broad range of regions, of sectors, of company size and company type. It’s been a fantastic year.”   s