Buyer’s market: IPO class urged to replicate IONOS and abandon US peer aspirations

Data InsightECM Pulse 3 February

Buyer’s market: IPO class urged to replicate IONOS and abandon US peer aspirations

After two weeks of intense investor meetings, the vendor on this year’s first major IPO, German web hosting firm IONOS, abandoned hopes of pegging the company’s value to a large US-based comparable and opted to be conservative. Other issuers looking to follow suit soon will have to do the same, sources tell ECM Pulse.

IONOS’ parent United Internet [ETR:UTDI] had been reportedly seeking a EUR 5bn equity valuation for the web hosting firm which would have put it at around the 2023 EV/EBITDA multiple of US peer GoDaddy [NYSE:GDDY].

However, as first reported by this news service last week, United Internet faced push back from investors and had to cut its valuation hopes to a market cap of between EUR 2.59bn and EUR 3.15bn to go ahead with the deal.

Identity crisis

An investor looking at the IPO said buysiders were unconvinced by the recent history of European IPO candidates, tech firms in particular, selling themselves as directly comparable to larger US competitors that not only have larger revenue streams but also benefit from being listed in a more liquid market with different costs of capital.

Europe’s technology pioneers have often hitched their wagon to established American-listed counterparts because of these firms’ high valuations and, in some cases, because there are few listed homegrown comparables in their sectors.

“Because of the perceived higher multiples in the US, naturally a lot of issuers like to compare themselves there,” said an ECM banker. “But I don’t think investors will jump with enthusiasm because we have the first available window; if anything, they are going to be more selective – especially when US peers are brought into the picture.”

Recent deal performance might be driving this reticence. Many IPO investors are sitting on large losses from some of Europe’s big recent tech listings, the much-hyped IPO class of 2021 being a particularly bad one for returns.

Many of Europe’s recently listed tech unicorns benchmarked themselves to highly valued US equity stories but in the past seven-years tech listings in Europe have largely underperformed the rest of the market, Dealogic data shows.

While many experience a first-year boost, momentum over the long term has suffered with tech deals in Europe producing a combined weighted return of 9.7% in the last seven years, from offer to share price as of 27 January 2023, the day of IONOS’ price range announcement. This pales in comparison with a 17.2% return for non-tech IPOs, according to Dealogic data.

Much of the problem is that issuers may have priced IPOs at equity multiples that were just too high; “pricing to perfection” as many in the market term it.

They claim high growth to justify these multiples, but future growth can be a treacherous valuation marker. Unlike many cyclical stocks, there are not many points where a tech stock becomes too cheap not to buy and a high initial IPO multiple, benchmarked to an aspirational peer, means there is further to fall if their growth slows down.

“It has always been an issue with European companies trying to compare with the US at IPO and it just isn’t the same, it’s something we are now pushing back a lot more on,” said the investor.

IONOS example

A second banker said that the IONOS price range released last week was “very sensible” and that it showed a cautious approach to getting the IPO done, rather than trying to push a deal at a level where investors are not comfortable.

The strategy worked for United Internet with investors covering the deal on the full size within hours of books being opened on Monday (30 January).

The speedy covered message shows that United Internet had done enough in terms of valuation to get investors on board, although a second investor added that his firm had decided not to take part as it was still not a significant enough discount to GoDaddy to be attractive.

Bankers speaking to ECM Pulse this week said that other candidates will have to take a similar haircut on their valuation hopes to please investors who are still concerned about inflation, recession and equity market losses after a bruising 2022.

EuroGroup Laminations, an Italian producer of steel components for electric motors, announced its IPO price range on Tuesday (31 January), which valued the company at EUR 861m-EUR 983m, under the “well over EUR 1bn” the company had been seeking before launching its Milan listing.

This is easier said than done.

Bridging the gap between investors, who want to acquire IPO shares at the best possible value, and issuers, who feel on paper that their companies are of as high quality as US-listed peers, has been the barrier to many a public listing in Europe for years.

But with interest rates heightened, equities off historic highs and much of the continent’s recent IPO performance sub-par, investors have more reason than ever to push back.

This year looks like a buyers’ market.

Did you enjoy this article?

Add the following topics to your interests and we'll recommend articles based on these interests.

IPOs ECM Technology

Seamlessly connecting banks and investment firms

the Dealogic platform is a single solution that gives you integrated content, analytics, and technology

Get access today