A Schott in the Arm – First big autumn IPOs excite but could still reopen old valuation wounds

Data InsightECM Pulse 11 September

A Schott in the Arm – First big autumn IPOs excite but could still reopen old valuation wounds

Two new autumn listings have emerged on either side of the Atlantic to set tongues wagging, but there are fears that issuers’ price demands could add further pain to an IPO year that surely can’t take any more.

In the US, the NASDAQ listing of Softbank-backed [Tokyo:9984hu] UK chipmaker Arm is the one everyone has been waiting for, while German Schott Pharma, the medical bottles and vials unit of Schott AG, is expected to be the most prominent IPO of H2 the other side of the pond.

Both issuers have gone early in the window, keen to get their IPOs out into the market while underlying equity indices remain benign, but investors are still jittery around price.

Arm’s potential IPO valuation of over USD 50bn is higher than many wanted to pay, but there are reports that the IPO is covered well in excess of its size and may price at the top of its valuation target.

The small freefloat (below 10%) and the far more liquid US aftermarket might help Arm get away with a higher price tag than some buysiders are comfortable with, said an ECM investor.

But in Europe, issuers may not be as fortunate as investor concerns swirl around Schott Pharma’s high valuation ambitions.

Chris Ennals, IPO consultant and former ECM Managing Director at Credit Suisse, said that "to get investors to take the plunge in an IPO market that has not yet fully reopened, issuers and investors need to find more common ground on value and an appropriate level of IPO discount”.

But he noted any such an alignment was made more difficulty by the volatility and macro uncertainty seen in the past months.

A long Schott

Schott is reportedly seeking an IPO valuation of around or above EUR 4bn for its pharmaceutical unit, as a source close to the deal confirmed the issuer was “very price sensitive”.

Just after the intention to float, Schott Pharma’s CFO Dr. Almuth Steinkühler told this news service that the company was confident in hitting its valuation target.

Schott Pharma reported FY22 sales of EUR 821m (up 27% YoY) and EBITDA of EUR 219m (up 33% YoY).

Some of the closest comparables for Schott Pharma include Italy-headquartered, US-listed Stevanato Group [NYSE:STVN] and German drug packaging maker Gerresheimer [ETR:GXI], according to analysis by this news service, supported by the source close to the deal and the ECM investor.

Stevanato trades at a FY22 EV/EBITDA multiple of 30.4x and Gerresheimer at 15.3x 2022 EV/EBITDA multiple, putting the average EV/EBITDA of the two at 23x. This would value Schott Pharma at around EUR 5bn, implying a 20% discount to fair value should it go with the reported EUR 4bn price tag.

A valuation closer to Stevanato’s multiple would put Schott Pharma on a fair-value basis of EUR 6.6bn, with a EUR 4bn tag representing a 40% discount. But benchmarking it solely against the Gerresheimer multiple would see Schott Pharma valued at EUR 3.4bn.

Schott Pharma recorded margins of 26.7% for FY22, marginally lower than Stevanato’s 26.8% but above Gerresheimer's 19.5%.

The company considers multibillion groups West Pharmaceutical Services [NYSE:WST], Becton Dickinson and Co [NYSE: BD] and Basel-headquartered Lonza AG [SWX: LONZA] as possible peers, according to another source close to the deal.

Benchmarking Schott Pharma against preferred peers Stevanato, Becton, and Lonza would imply an average 22.3x EV/EBITDA and a valuation of around EUR 4.9bn, the second source added.

For the first nine months of FY23, sales were up 8.4% YoY to EUR 670m, with EBITDA up 9.3% YoY to EUR 187.4m, according to the IPO documents. If the company keeps growing at the same pace, it could end FY23 with sales of EUR 890m and EBITDA of EUR 239m.

Same old tune

The syndicate is trying to direct investors towards Stevanato as a peer instead of Gerresheimer, said the first source close to the deal, arguing the latter is less like Schott Pharma.

The ECM investor saw Schott Pharma as a mix of its peers, with some crossover between Stevanato and Gerreshiemer. But he was wary of any company using US-listed peers as IPO comparables for European businesses, a theme ECM Pulse highlighted as problematic at the beginning of 2023.

Because it is European-listed, Gerresheimer is more of an obvious peer, said the investor although he conceded some of its business was lower margin than Schott Parma’s.

A EUR 3.5bn valuation would be more compelling, given the underperformance of recent IPOs versus their benchmarks, said the investor.

The EUR 3.5bn price tag would represent a 30% discount to a Gerresheimer/Stevanato multiple average, roughly in line with investor discount demands throughout the year on European IPOs. This would also still be in line with company assumptions, said the second source.

While sentiment is better, Schott Pharma’s goal to trade at a premium to some peers is still a challenging ask, said another banker.

Both investors agree Schott Pharma is a “great” business, noting that any reticence would be around IPO pricing rather than the business fundamentals.

The first investor said his firm has started to avoid buying IPOs at pricing, instead waiting for them to trade down in the aftermarket. “We have made a lot more money that way,” he noted.

Schott Pharma declined to comment on this story.

Analytics by Raj Saiya

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