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Investors driving boom in Italian IPOs

By UniCredit
10 Dec 2015

Since the 2008 financial crisis, for a number of years subdued activity in IPOs was believed to be the norm on Italian exchanges. Yet since 2014, political and economic trends are changing the script — prompting a boom in Italian IPO activity, according to Stefania Godoli, global head of equity capital markets at UniCredit.

The market for initial public offerings (IPOs) in Italy is experiencing a sharp upturn, with political and economic forces converging to create ideal conditions for Italian companies to list on the stock market.

This is part of a wider economic trend that is seeing mainstream investors turn their attention to Southern European countries, now firmly on the path to economic recovery following the damage to investor confidence caused by the sovereign debt crisis.

UniCredit Economic Research foresees Eurozone growth to gain further strength in 2016, reaching an annual average GDP growth rate of 1.9%, with Italy rebounding further to 1.4% in 2016 from 0.8% and Spain keeping traction at 2.9%. It is an encouragingUnicreditiposign development — and one that coincides with the Italian government’s largest privatisation initiative since the late 1990s.

This focus on IPOs seen in the public sector is being matched in the private sector too — with Italian companies coming out in force to list on the stock exchange.

Of course, these companies will need to pay careful attention to their preparation. This is an area where they can benefit from the expert support of a banking partner — introducing them to investors and showing them how to organise and present their company to maximise success. It is an element that should not be underestimated — particularly given the competition as companies rush to take advantage of this long-awaited opportunity.

Investors’ focus shifting to Southern Europe

And it certainly has been a long wait. Following the global financial crisis in 2008, it was the US that was fastest to recover — quickly becoming the focus of investor interest, with major stock indices such as the S&P 500 reaching record levels.

The economic recovery of Europe’s major economic powers, Germany, UK and France, triggered the interest of institutional investors keen to diversify their portfolios out of US assets.

The unfolding of the sovereign debt crisis in July 2011 forced institutional investors to shy away from Southern Europe and concentrate their investments on core European countries. Renewed confidence in Southern Europe emerged following ECB President Mario Draghi’s “whatever it takes” message in July 2012. Spain and Italy, in particular, benefitted from increased investor appetite, prompting the re-opening of the IPO market in these countries.

Public companies going under the hammer

When it comes to firms seeking IPOs, Italy has plenty of supply to meet the demand. The bulk of this comes from a number of high-profile public companies lined up for privatisation as part of Prime Minister Matteo Renzi’s focus to reduce the country’s sizeable public debt.

Certainly, now is an excellent time for Italy’s public companies to go private — with strong investor demand for Southern European assets enabling them to command a favourable price. This concept was proved earlier this year with the IPO of Spanish airport operator Aena. The Spanish government successfully sold a 49% stake in the company, equal to approximately €4.3bn.

 Similarly, Italy’s privatisation push has already hit the ground running. In October, the government raised €3.1bn from the sale of a 35.3% stake in postal company Poste Italiane — a compelling indicator of investor faith in the Italian economy. The deal was very successful with demand sourced predominantly from UK and US investors with a broad representation from tier one long-only accounts, comments Paolo Garzarelli, managing director for UniCredit ECM Italy.

And more privatisations are in the pipeline. Air traffic control operator ENAV is expected to debut on the stock market in the first half of 2016, while the national railway company, Ferrovie dello Stato Italiane, will potentially be floated in the second half of the year.

Of course, even a remarkable return on these IPOs will not overturn Italy’s public debt on its own, but a strong showing will nevertheless demonstrate that the government is taking effective action on multiple fronts to improve the country’s financial situation.

Private companies coming in from the cold

Of course, with investors showing continued interest in Southern European assets, Italy’s private companies are also looking to cash in on the opportunities. Many of these have been keen to list for years. For instance, Italy’s numerous family-owned companies are subject to changes of direction as they pass down the family line. New directors often see IPOs as a means of taking the business in new directions, or even relieving them of their responsibilities. Other companies are simply seeking growth, using IPOs to raise their profile, attract talent and stimulate growth. Then there are many private equity firms who have bought, restructured and profited from Italian companies and decided the time is right to offload and look for new investments.

In the past, companies like these have been holding back from going public as investors were still focused first on the US and then on ‘Core Europe’.

In the past few years as investors’ attention turned to Southern Europe and the peripheral economies, it is being met with a backlog of companies looking to list on the stock exchange. Supply and demand are finally in alignment — and activity is booming as a consequence.

Preparing for success

This positive market sentiment will have Italian firms clamouring to tighten up and polish their equity stories, looking to find the most favourable ways to present their growth, margins and competitive advantages. Of course, partner banks are ideally placed to help here, offering a fresh, unbiased perspective, informed by experts in asset evaluation.

Beyond this, they can help in other areas. For example, firms will need to partner with investors — an important but quite new task for private and public companies alike. Support from a partner bank can be invaluable in this respect — helping firms develop their book of demand by meeting and building relationships with investors.

Companies will also want to make sure their board is structured and operating in accordance with corporate governance best practice, ensuring, for instance, that incentive plans laid out by core managers are in line with the company’s objectives for the next few years.

These features tend to be thoroughly scrutinised by potential investors — making it crucial that they present companies in their best light. Using the expertise and objectivity of banks is a reliable way of making sure these key indicators paint a favourable picture.

Certainly, if companies get their preparation right, they can tap into a lucrative market. The investment world has entered a new phase, and international investors see Europe’s peripheral economies as a major source — perhaps even the major source — of profitability in the years to come.

By UniCredit
10 Dec 2015