Deal sizes head south

  • 25 Jul 2003
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The return of offerings in smaller, riskier and illiquid companies is good news for the equity market, writes Steve Metcalfe.

From mass sell-off to rapid recovery, the mid-cap sector in Europe has staged a remarkable turnaround in recent months.

The sector was badly affected during the first few months of the year, when nervous investors turned away from riskier small companies, but the recovery in sentiment over the last quarter has resulted in the sector bouncing back.

In the UK, the FTSE-250 rose by 25% from April to the end of June, outperforming the FTSE-100 by 17%, and similarly impressive results have been recorded across Europe.

As a result, there has been a dramatic increase in the number of mid-cap placings. Corporates have taken advantage of the rally to sell stock to investors keen to buy shares at low levels.

In the UK, investors bought in enthusiastically to the first two flotations on the London Stock Exchange's main market: the £25m offering of oil engineering firm Sondex and reinsurance broker Benfield's £157m IPO.

The success of the two offerings helped revitalise the moribund IPO market, with Yell launching its £1.14bn flotation just a few weeks after. Sondex is now trading at 118p, 18% above issue price, while Benfield has risen 8% since floating at 250p.

Solid support
"I think the trend of placings will continue, because although we do not see much room for upside at the moment, the market is pretty well supported at these levels," says Rob Giles, UK smaller companies fund manager at Gartmore.

The move towards mid-cap stocks has indicated a growing tolerance for risk and a more positive fundamental view among investors.

Mid-caps usually react quicker to an economic upturn than large, multi-national stocks, which are less nimble and slower to adapt to new operating conditions.

Over the past few months there have been signs of institutions, especially large cap investors, taking large holdings in mid-caps.

Fidelity, for example, has taken a 14% stake in bookmaker William Hill, as well as a 10.5% holding in pubs owner Punch Taverns.

And last week, media company HMV said that several funds had taken major stakes - with Invesco Perpetual owning 5% of the company, HBOS 4%, Prudential 6%, and ISIS Asset Management 9%.

Tim Haston, head of research at ISIS Asset Management, says that the M&A pick-up in the retail and pub sectors in recent months is indicative of the return of interest in mid-cap stocks.

"The companies that buyers have been attracted to are those that either have a strong property backing or an ability to generate a cash return on investment, such as retailers or pubs," he says.

But he also points to a structural reason why the mid-caps have rallied so much more than large caps.

"If you look at the make-up of the FTSE-100, it is dominated by banks, telecoms, oil companies, and pharmaceuticals.

"Two of those sectors - oils and pharmas - you would not want to back going into a reflationary environment."

Increasing activity in the emerging market telecoms sector also points to the increase in investor liquidity. Telecoms stocks have been out of favour for several years and emerging market companies in the sector are highly illiquid, as well as risky.

The South African government's $480m IPO of monopoly operator Telkom in March was an impressive achievement in dire market conditions, but the flurry of quick-to-market transactions since then has been equally notable.

In mid-April Deutsche Telekom raised $200m from a sale in Russia's largest mobile operator Mobile Telesystems. The shares were placed through a risk trade with Credit Suisse First Boston - and it was the largest such deal ever in Russia.

The following week, the European Bank for Reconstruction and Development sold its $54m stake in VimpelCom, another Russian mobile stock, through a Merrill Lynch managed accelerated bookbuild.

Both trades were completed at or near all-time share price highs.

Risk trades
CSFB also lead managed two other risk trades in illiquid telecoms stocks - a Eu220m block in Czech operator Cesky Telecom, and an Eu87m block in Luxembourg-based satellite company SES Global.

"Investors don't buy into mid-cap stocks unless they are confident, because they cannot easily get out of them," says Charles Kirwan-Taylor, co-head of European equity capital markets at CSFB.

But there is still a worrying feeling that the rally has been based on sentiment and M&A activity, rather than a real improvement in fundamentals.

"The main driver of the rally was that in hindsight, we all realised the small companies had got ridiculously oversold," says Giles at Gartmore. "The fundamentals have improved but the rally was mainly sentiment driven."

Other observers are hopeful that the rally will not fizzle out as others have done in recent years.

"As a theme, growth has much more currency now than in recent market rallies," says a head of equity syndicate in London.

All of which is encouraging stuff, undoubtedly - but it does not mean that the next IPO will be for an unprofitable internet or biotech company.

  • 25 Jul 2003

All International Bonds

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  • Last updated
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1 Citi 71,795.24 248 8.65%
2 JPMorgan 59,685.75 255 7.19%
3 Bank of America Merrill Lynch 52,401.35 173 6.31%
4 Barclays 50,153.02 148 6.04%
5 Deutsche Bank 44,937.03 167 5.41%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Deutsche Bank 9,857.42 14 13.05%
2 SG Corporate & Investment Banking 7,833.35 12 10.37%
3 Goldman Sachs 5,773.27 11 7.65%
4 Citi 4,606.54 14 6.10%
5 BNP Paribas 4,132.76 19 5.47%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 Goldman Sachs 2,546.04 12 11.21%
2 JPMorgan 1,732.54 10 7.63%
3 Credit Suisse 1,727.84 7 7.61%
4 Deutsche Bank 1,465.10 11 6.45%
5 Citi 1,285.41 7 5.66%