Initial Public Offerings Are Making a Slow Comeback

Financial News, January 4, 2004 | Go to article overview

Initial Public Offerings Are Making a Slow Comeback


Byline: Ben Sills

The last time investment bankers started talking up the initial public offering (IPO) market to financial private equity managers they did a very good job. Perhaps too good. If they want to persuade financial sponsors that the market is open again this year, then they will have to overcome a justified scepticism on their part and on the part of investors generally.The number of deals launched on behalf of private equity and venture capital firms in the second half of last year suggested that the bankers have made a good start. There is still plenty of work to be done.

Rupert Hume-Kendall, co-head of corporate capital markets for Europe, Middle East and Africa (Emea) at Merrill Lynch, said: "We've been doing deals since Baghdad fell. The home market is open and venture capital firms and normal corporates should think about it."

Merrill and Goldman Sachs led the IPO of Alea Group, a Bermuda reinsurer, on the London Stock Exchange in the first European IPO from Kohlberg Kravis Roberts (KKR), the US buy-out firm. Alea raised [pounds sterling]165m ([euro]237m) by issuing shares at 250p, the bottom of its bookbuilding range. Towards the end of last year the shares were trading at 255p.

Goldman and Merrill also led the revived IPO of Yell, the UK directories business, that was pulled by Apax and Hicks, Muse, Tate & Furst, the buy-out firms, in 2002. Yell's [pounds sterling]1.2bn IPO was the largest European flotation last year. Beyond those deals though, 2003 was a quiet year.

Neutral observers take a more conservative view. Andrew Burrows, director of the Centre for Management Buy-Out Research (CMBOR) at Nottingham University Business School, said: "There is bound to be pent-up demand for exits, but we won't see that until the market picks up further."

Tom Troubridge, head of the London capital markets group at PricewaterhouseCoopers, summarises the year succinctly: the first quarter was dire, the second was better and the third quarter was stronger still with the successful launch of Yell. Full data for the fourth quarter wasn't available at the time of going to press, but all the indications were that it would continue the positive trend.

Private equity houses should be a good source of new deals. There is a backlog of portfolio companies looking for exits. So the main advice is, if you are going to go, go quickly.

Nigel McConnell, managing partner of Electra Partners, Europe, said: "Sooner and bigger is always better in this game. If you have a floatable company it's better to go early than wait for someone else to stub their toe."

There was a fair amount of toe-stubbing last year. EQT, the Nordic buy-out firm pulled the Skr3.8bn ([euro]423m) IPO of Dometic, a Swedish fridge manufacturer, rather than lowering the price. Enskilda Securities and Merrill Lynch were leading the deal. Most of the biotech firms that floated in the US during the autumn are now trading below the issue price. "You have got to get the valuation right or you will come unstuck," said Jim Renwick, European head of ECM at UBS.

There have been good deals. Yell was floated at the beginning of August. Although it spent a good deal of its first month under water, in the run-up to Christmas it was trading above 300p, comfortably above its launch price of 285p.

PwC's Troubridge said: "The Yell transaction caused everyone to sit up and think. It demonstrated that when there is a good company available, then there is demand."

There has also been activity from the technology sector, for the first time since the height of the bubble. The October flotation of Wolfson Microelectronics, the UK semiconductor company, raised nearly [pounds sterling]70m and many eyebrows. Citigroup was sole bookrunner of the offer which was the UK's largest technology IPO for more than two years. Early investors were Scottish Enterprise and the city of Edinburgh, while UBS Capital and WestLB provided later rounds of funding. …

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