- Galderma market cap could come at USD 11.9bn-USD 12.6bn with 30% discount
- Thyssenkrupp’s Nucera slotted for June but valuation gap could delay plan
Europe’s IPO pipe is in flux again after a disappointing start to the continent’s third major IPO of the year, Italy’s Lottomatica [BIT:LTMC], calling into question how low can valuations go to get investors on board.
Lottomatica’s share price recovered from an initial 10% drop to around 4.54% below the EUR 9 offer price. But the rocky aftermarket performance reflects a deep frustration among investors that they are not being listened to.
“There is complete denial among some banks that something is wrong,” one investor said. “They are not letting the market price these IPOs but telling us at what price they should be.”
As the ECM Pulse reported two weeks ago, Lottomatica was eventually sold at 6.3x 2023 EV/EBITDA, a big discount to peers and around a 30% concession to Lottomatica’s consensus fair value of 9x.
“It couldn’t come any cheaper,” said a banker on the deal, adding that investor reticence to final pricing was a sign that buysiders were only interested in IPOs on the cheap.
IPO buyers are looking for around a 30% concession to fair value, said the investor echoed by other bankers. The question is that many in the market did not agree with the syndicate’s view of fair value, the investor argued, therefore challenging the generosity of the discount.
“Of course, it could have come cheaper,” the investor added, pointing to the aftermarket trading. “Lottomatica wasn’t expensive, but it certainly wasn’t cheap”.
Many investors used the company’s single country Italian exposure or anti-ESG profile, being in gambling, as an excuse not to take part, said another banker on the deal. But for deals to work though, he added, it seemed discount levels need to be wider still.
Is the pipe blocked again?
The market’s fear is that another loss in Europe’s IPO column will stall an already slow IPO calendar. Several issuers have reportedly delayed notable deals due to valuation gaps.
One of the largest names on the list is EQT’s premium skincare division Galderma, widely expected as one of the blockbuster IPOs of 2022, bumped into 2023.
EQT has reportedly been unwilling to exit the company at too great a discount to peers, including eye care group Alcon [SWX:ALC] and cosmetics giant L’Oreal [EPA:OR].
Alcon trades at around 23x 2022 EV/EBITDA while L’Oreal trades at 26x, according to data from Fidessa compiled by FactSet. Galderma has a 2022 EBITDA margin of around 21%, slightly above Alcon but below L’Oreal, which had a margin of above 23%.
Should the Swiss giant price in between the two peers, at around 24x 2022 EV/EBITDA, it would command an enterprise value of roughly USD 19bn, given 2022 EBITDA of USD 791m.
Galderma has around USD 5bn of net debt, according to a source close to the situation. This would imply a market cap of around USD 14bn. A 30% IPO discount would take Galderma’s enterprise value to USD 14.8bn and its market cap to around USD 9.8bn, assuming no primary issuance.
However, the source said Galderma’s fair enterprise value is likely to sit between USD 22bn and USD 24bn, with a market cap of around USD 17bn to USD 18bn, as projected growth is expected to take 2023 EBITDA to around USD 1bn.
A 30% discount to this figure would bring the company’s IPO market cap to USD 11.9bn-USD 12.6bn and its discounted enterprise value to roughly USD 16.9bn-USD 17.6bn.
Another perennial IPO candidate has been Thyssenkrupp’s [ETR:TKA] electrolyser division Nucera, which sources say had been seeking a listing before the summer.
Valuation talk on Nucera has been varied, with recent reports suggesting a EUR 2bn-EUR 5bn range based on Nel [OSL:NEL] and ITM Power [BIT:ITM]. A 30% discount points to a valuation range of EUR 1.4bn to EUR 3.5bn.
Lottomatica has set a bad precedent for the market, said a source close to the Nucera deal, adding that Thyssenkrupp’s management might delay the plotted June listing.
However, Thyssenkrupp could greenlight an IPO at the lower end of the valuation range, at around EUR 2bn to EUR 3bn, with the hope of a recovery in the aftermarket, he added.
The perks of being public, including cost of capital benefits and ability to access equity funding are of importance to many corporate issuers like Thyssenkrupp, an ECM banker noted, and should outweigh reticence over an initial low IPO price.
EQT and Thyssenkrupp declined to comment. Galderma did not respond to comment requests.
Despite the IPO gloom in Europe, the listing of Johnson & Johnson’s [NYSE:JNJ] consumer health subsidiary Kenvue [NYSE:KVUE] is providing a more upbeat precedent.
Kenvue’s IPO discount was around the magic 30% level to fair value, one source familiar with the deal said, adding it could have priced higher.
“You have to make the range a no-brainer for investors,” the investor added.
The company has popped around 20% since the IPO a week ago, a performance not seen in Europe for some time. Even Porsche [ETR:P911] had only risen by just over 6% in the first week after IPO.
Issuers want to do deals, but closer to the traditional 10% to 15% discount to fair value, especially given benign underlying markets, said the source familiar to Kenvue. “But that really doesn’t matter because all the cards are with the buyers.”
“What we need is a knock-out asset, like Porsche, that comes at a good price,” he added. “Everyone becomes engaged once one or two deals go well.”
Until that happens though, Europe’s IPO malaise is set to continue.
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