Spin-offs help ease IPO jitters

Of all the problems presently facing Germany, it is unlikely that a stuttering equity capital market is getting much attention versus the challenges of welcoming hundreds of thousands of refugees.

Yet it is a worry that Europe’s largest economy is struggling to support companies’ growth through transition from the private to public market.

Just one company has completed an IPO of over US$50m on the German exchange in 2016 – wind turbine company Senvion. And it was not an easy path to pricing, with the deal cancelling at the end of bookbuilding, only to be restructured as a far smaller trade and revived within days.

The float was to allow private equity owners Centerbridge and Arpwood to sell down their stakes, raising up to €611m in the process. In order to get the deal done, it was relaunched with a lower valuation for the company and minimal selling by the owners for a deal of €255.9m.

Of course, too much attention should not be paid to a single deal – and no part of the EMEA region could claim to have had a successful first quarter as issuance volumes collapsed and IPOs were postponed more often than priced.

If only Senvion was a one-off. In fact, it marked the fourth consecutive German IPO to be significantly downsized in order to be completed. That record is exceptional in EMEA. But is it a cause for concern?

Worrying trend

Senvion followed Covestro, Schaeffler and Hapag Lloyd – all in October 2015 – in cutting its IPO to fit demand. Also in October, Xella cancelled its €200m-plus IPO.

Across the four downsized deals, target proceeds dropped by over €3bn. This pattern is unique in Europe, though the reality is that in other nations in the fourth quarter deals were instead postponed.

“In the fourth quarter last year, deals across the region were collapsing and many cancelled, but in Germany sellers restructured deals,” said one head of Germany, Austria and Switzerland ECM. “Rather than being a disappointment, the achievement was getting those done. It highlights the need to be flexible and doing what you can to optimise a deal.”

Jens Voss, head of equity capital markets at Commerzbank, echoed that point.

“All these IPOs in a row modified after launch show that investors are not willing to pay high multiples,” he said. ”Covestro traded up significantly, showing this is a buyers’ market. But the deals all got done when others cancelled. So there are positive and negative signs, it is a really complex situation.”

While that run of deals spoiled the end to the year, October also witnessed the €1bn IPO of digital marketplace Scout24, which suffered none of the problems of the other deals. By year-end, IPO proceeds in Germany reached US$7.7bn, more than double 2014 and the highest level since 2007.

While acknowledging the difficulties, Armin Heuberger, head of German ECM at UBS, said there had been a real renaissance in the IPO market, citing the completion of a number of corporate deals, including Covestro, Schaeffler and Hapag-Lloyd’s IPO – a transaction that was first attempted over 10 years earlier.

Each of the deals could easily have cancelled, yet the issuers chose not to waste the time invested in the process and adapted to survive. It was the right choice, as shown by the Schaeffler family six months later being able to sell all the shares that were cut from the IPO. Covestro traded strongly from the start and the shares now trade in the upper part of the IPO price range.

By contrast, those that cancelled IPOs, including Xella and food delivery company HelloFresh in November, are not coming back any time soon.

Scared off

Nonetheless, the impact was clear in the first quarter as issuers shied away from coming to market. That held true even for smaller offerings, with the €30m IPO of Brain the only other new issue and one that was strongly supported by existing shareholders.

“IPOs are a tough sale right now, so most corporates have postponed their listings and done another round of financing before an IPO,” said Verena Kronenberg, senior originator at Baader Bank. “We cannot just sit and wait, our task is to find a way to structure things that work, such as pre-IPO placements.”

Kronenberg highlighted that German regulations are not always as flexible as those in other countries, such as France, and so some ideas may not work. However she noted that in one situation where one idea was not possible, the process had identified a cornerstone investor and then a new plan was structured around them.

Secondary equity markets have been muted for much of this year, with the DAX trading sideways. But there has been sufficient volatility at the same time to lift the VDAX above 30 in February, scaring many issuers away.

“We had a good pipeline coming in to the year but those deals have not happened,” said Voss at Commerzbank. “We also don’t see a lot of issuance windows, with Brexit, oil prices and US elections all impacting on sentiment in the first half. So, potential issuers need to be very opportunistic and be ready to hit the button when a small window opens.”

The head of GAS ECM suggested that the critical factor is bringing compelling opportunities to market, not me-too assets.

“The pipeline is not bad, but what really matters is what can get done. It is not easy to get investor engagement and deals are getting pushed to later in the year,” said Weiner. “But look at what happened with VAT in Switzerland – bring a quality asset with good margins, market share and management, and investors will buy.”

VAT’s SFr540m (US$565m) float – the first IPO in Europe since Senvion – was covered on the first day, was over 10 times subscribed, priced just one franc off the top of the price range and then traded up 13.5% on debut.

The German IPO pipeline is not bulging with similar fare, although there is reason to be cheerful due to a trio of corporate restructurings that, due to their size, will mean IPOs in each case.

E.ON, RWE and Metro are all preparing to spin off operations this year in separate listings. Full marketing efforts and placing of stock is expected in each case rather than listings with all stock distributed to existing shareholders. Deutsche Bank is planning something similar with Postbank, but bankers are not confident on that deal happening any time soon.

“When you rely on a heavy sponsor pipeline where a large portion follows a dual track, a corporate pipeline is more reliable – as the IPO is about more than just price – and we could see more of these corporate reorganisations,” said Heuberger.

Indeed, all bankers cited the three deals as significant. One highlighted that as all three new companies are already listed, then these are not “real IPOs” and so may not give an indication of how other deals may perform.

While true, it is the same investor base for all new issues – new names to the market or not. As a result, if these three all perform well, it will help sell the unknown issuers when they follow. Or so the theory goes.