Shares of Italian gambling firm Lottomatica fell on their first day of trading on Wednesday, despite efforts to ensure its €600m IPO would be a success.
Lottomatica shares were sold at a generous discount to its peers at the bottom of a €9–€11 range, yet the stock opened on Euronext Milan at €8.50 and dropped as low as €7.958 in the first hour of trading, a fall of 11.6%.
Shares recovered slightly to close down 8.9% at €8.20. Approximately 13m shares changed hands, nearly 20% of the 66.6m shares sold in the IPO.
It is hard to see what could have been done differently.
“We’ve done everything we can to get the best result, tightly allocating, scaling back, reducing the tail and giving long-only money less than what they hoped for in order to incentivise them to buy in the aftermarket,” said a banker at one of the global coordinators. “We are seeing buying but not in the amounts that they should be. I think it’s investor nervousness but it’s hard to give an exact reason why IPOs are not trading well.”
A syndicate head at another global coordinator said: "It was a decent business at a decent price and a good discount to both peers and fair value. Maybe it could have been €100m or €150m smaller, possibly a little cheaper; those were the two levers we had available to us. But we gave allocations last week and got the feedback we expected.”
A senior banker away from the deal – without a hint of criticism – said that he could probably guess 80% of the top 10 or 20 lines in the book, as the current list of likely buyers is so short.
“It’s fair to say that the breadth of the investor base right now is thin,” said the syndicate head. “When it is not a real marquee asset, the breadth is even thinner. It would be hard to build a proper position in the market and much of the liquidity disappears after day one, so they would have had to buy in the IPO.
"Investors [may] ask if they want to invest in another IPO if they know they could be losing money on day one, even if they later make it back as you saw with Porsche and De Nora trading up after initial sluggishness."
The first banker said that Lottomatica has failed to prise open the IPO market despite being a quality asset. Other than small, largely local deals for Italian Design Brands and Romania’s Agricover, there are few deals certain to launch this year beyond Hidroelectrica, which has a government-imposed deadline of the end of June.
Bankers involved and away from the deal agreed that the lack of confidence from investors in the IPO product will continue, but feel that a few solid aftermarkets could quickly change the mindset, although on the current run rate that is unlikely to happen before Q2 2024.
“It’s almost a fait accompli, with investors believing for long enough that the IPO market is broken that it ends up being broken,” said a global ECM head not involved.
He said it was unhelpful to see this year's third European IPO in a row trade badly following Ionos and EuroGroup, which both fell on debut.
The trend continues from last year when Ithaca Energy closed down 8% on its debut in November and has failed to break issue since. Even Porsche's jumbo €8.2bn IPO closed flat to issue on its first day and dropped below in the following days before eventually recovering.
Earlier in 2022, Italian water and energy firm Industrie De Nora spent around a month below issue before finally trading up.
The global ECM head compared 2022 to 2001 when the dotcom bubble burst, and this year being like 2002. Notably the European IPO market did not really return until 2004.
If no one knows what constitutes a good IPO until it breaks, having the best part of a year to work that out – sector, sizing, best investor base, discounts and syndicates – may not be a bad thing.
Goldman Sachs is stabilisation manager for Lottomatica, and global coordinator with Barclays, Deutsche Bank, JP Morgan and UniCredit/Kepler Cheuvreux. Apollo Capital Solutions, Banca Akros, BNP Paribas and Mediobanca are joint bookrunners with Equita SIM co-managing and Credit Suisse advising.
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