Block party - European ECM investors bank alpha

Data InsightECM Pulse 29 June

Block party - European ECM investors bank alpha

While Europe’s IPO doldrums may dominate discussions within ECM circles this year, a small but steady flow of recent accelerated transactions has allowed shareholders to trim their holdings and given issuers a route to quickly raise capital without the rigmarole of a rights issue.  

Perhaps most importantly of all, investors have made money.

Last week saw several accelerated deals, including large primary transactions in Ocado [LON:OCDO] and Aedifica [EBR:AED]. In the secondary market, GBL [EBR:GBLB] sold a NKR 4bn (USD 405m) block in Norwegian salmon producer Mowi.

All three deals were priced at significant discounts and are all trading above the offer price, generating returns for investors.

The transactions all fit into a trend in the blocks market of deals being priced at significantly wider discounts than they would previously, trading up in the aftermarket. Three ECM bankers said that discounts have noticeably widened in reaction to market volatility. “Investors are asking for wider discounts on a whole. What would normally price at a 3% to 4% discount is now far closer to 6% or 7%,” said one of the bankers.

Block trades in April were priced with an average weighted discount of 5%, Dealogic data shows, a relatively narrow concession given the turmoil in wider equity markets, bankers speaking to The Pulse say. That average discount proved too narrow to keep blocks above water and stocks suffered post-completion, both primary and secondary, trading down a weighted 9% on average since pricing. They outperformed only 3% vs the STOXX 600 since the beginning of April.

In May, discounts widened considerably to an 8% weighted average concession. Performance of deals benefited considerably as a result with blocks priced in May producing a weighted return of almost 7% and outperforming the STOXX 600 by 16.9% from the beginning of May.

In June, discounts tightened slightly across the board to a weighted average 6.9% generating an absolute weighted return of 1.4% and outperforming the STOXX 600 by 9.7% over the same period.

Long-onlies in driving seat

Deeper discounts are being driven by wall-crossed investors, bankers say. Deals are being anchored by long-only investors rather than typical deal-playing hedge funds who, while still involved in deals, have become less active given broader stock market losses.

Long-only investor participation is a pre-requisite in primary deals, with many largely sold to existing shareholders as was the case in the Ocado trade. But they have also become more active on secondary blocks, one of the bankers said.

“Discounts have become much more sensible, and books are far cleaner than they have been in some time and there are some great opportunities, particularly in primary,” said a long-only ECM investor. “But if it is the right sector and the price is sensible, we would absolutely look at secondary deals as well.”

While the blocks market is open, all sources speaking to The Pulse reaffirmed that it is highly selective; not all names will be welcomed, even if at a hefty discount.

One ECM banker said that plenty of block trades wall-crossed in the past few weeks have ended up not being launched, proving that there is still a barrier to entry.

But he added that the positive performance of accelerated bookbuilds (ABBs) in Europe in the past two months has led to the continent’s accelerated market enjoying a mini renaissance amidst a tough year, unlike in the US and Asia, where deal flow remains low.

The investor said he would urge all sellers to remain cautious rather than too optimistic when reading the market. Deals have to be sensibly wall-crossed and suitably de-risked before launch, he cautioned.

“This is definitely not the sort of market for auctions and unexpected risk trades,” he added.

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