Italian gaming company Lottomatica's IPO is off to an encouraging start, but investors are still nervous that the discount on the deal may not be enough to guarantee a positive aftermarket.

The IPO was “covered on the full deal size” on the morning of Monday, 24 April, shortly after books opened, according to a bookrunner note.

Investors speaking to the ECM Pulse over the last week expressed concern with a price range that one termed “not expensive but also not cheap.”

The EUR 9-EUR 11 range values Lottomatica at a market cap of EUR 2.27bn-EUR 2.67bn and an enterprise value of around EUR 3.57bn-EUR 3.97bn given the company’s targeted post-IPO debt of EUR 1.3bn.

As the ECM Pulse reported last week, sell-side analysts were marketing Lottomatica between 8x and 10x 2023 EBITDA and its closest reported peer Entain [LSE:ENT] trades at just over 10x, according to data from Fidessa compiled by Factset.

Three deal sources said analysts’ consensus was around 9x predicted 2023 EV/EBITDA of EUR 563m, around the middle of its initial 2023 guidance. At the bottom of the range, Lottomatica would trade at 6.3x 2023 EV/EBITDA and at the top at around 7x.

Fair value debate key 

If investors believe the analyst consensus at around 9x 2023 EV/EBITDA, then the implied discount of 30% at the bottom of the range is in line with investors’ views of the level of discount needed for IPOs to succeed in this difficult market, as reported by the Pulse last week.

But if investors think that Lottomatica should trade at 8x or under, on a fair value metric, then the deal becomes less compelling, with the bottom of the range only a 21% discount to EV of 8x EV/EBITDA.

All IPO market veterans will know that the wording on bookrunner messages is scrutinised in meticulous detail to try to decipher the strength of the book.

Two sources on the deal said that investors they spoke to found that valuation compelling and confirmed that the book was covered “off the bottom” of the range.

“It is a tricky one as we love the space,” said a second investor. “But there is an element that to be successful in this IPO market the valuation needs to be a no-brainer.”

“If you are even in the camp where we are discussing whether the valuation makes sense you are almost pushing it too far.”

With the deal already covered more than its size, there is no question that the IPO is viable, raising EUR 425m to help pay off company debt as Apollo also banks some proceeds from a secondary sale. The question remains though whether the company can race ahead in the aftermarket.

Need a win

With the first two major European IPOs of 2023, German web-hosting firm IONOS [ETR:IOS] and Italy’s Eurogroup Laminations [BIT:EGLA] suffering large post-listing declines, IPO sentiment in Europe remains largely despondent.

Last week an investor told the Pulse that he would want to see a EUR 2bn book on the EUR 600m IPO to be confident on the stock’s success once priced.

One of the deal sources said on Monday that, although it was early days, demand in the book indicated that Lottomatica should comfortably build a EUR 2bn book.

The book was mostly full of hedge funds early on, two sources said, adding that more long-only orders appeared throughout the day.

Three sources said that there were significant long-only institutional anchors and blue-chip names solidifying the book, with one of them adding they anticipated strong interest from US funds through the evening.

There is a national holiday in Italy on March 25, but orders are expected to come in from Italian funds throughout the next couple of days, even if initially delayed, the same source added. Another said he expected far greater domestic participation than the 10% to 15% participation common in Italian IPOs.

Lottomatica is likely to be one of the few major European IPOs until the summer so its performance will inevitably colour sentiment towards the pipeline.

Sources speaking to this news service say that Thyssenkrupp [ETR:TKR]’s hydrogen division Nucera is the next likely large-scale IPO candidate in Europe. The conglomerate was reported to be eying an IPO in early summer.

One of the investors said the company was a huge global player in a hot sector and therefore would likely appeal to an even broader investor base than Lottomatica.

But with Thyssenkrupp already delaying Nucera’s listing over valuation last year, the last thing the German conglomerate will want is an even sourer IPO market.

Lottomatica and Apollo declined to comment.