Price must be right - EMEA IPO wave builds pre-summer but sellers must scale back valuation hopes

Data InsightECM Pulse 12 June

Price must be right - EMEA IPO wave builds pre-summer but sellers must scale back valuation hopes

Europe’s equity capital markets have sprung to life with four live IPOs being worked on for pricing before summer, but investors stress nothing has changed in their view that deals must be valued cheaply to be a success.

Turkish soda-ash company We Soda, Romanian state-owned hydroelectric company Hidroelectrica and fintech firm CAB Payments, also known as Crown Agents Bank, all released intention to float documents in the last fortnight, confirming the start of an IPO process. Thyssenkrupp [ETR:TKA] did the same on Monday, June 12, for its water electrolyser and hydrogen division Nucera.

The return of deals has been greeted warmly by equity capital markets bankers.

“Windows really go in waves, a month ago there was nothing, and now we are seeing all these deals,” said one ECM banker.

The four names in the market have either strong cash flow profiles or a solid ESG story to hang growth on, sometimes they have both in the cases of Hidroelectrica and We Soda.

“They had to be good names, we could not bring assets to market that were not good assets and high margin businesses,” said a second ECM banker. “The reality is that it is now about valuation and that is the bit of the debate that is going to continue to be the issue.”

Europe’s IPO market is in desperate need of success with the continent’s new listing volume the lowest it has been YTD for a decade, including 2020 as the Covid-19 pandemic was raging across the developed world.

In IPOs success breeds more success and strong pricing and trading for these four deals could bring other issuers to market and cause more investors to engage with the product.

Different time, same investors

An ECM investor said that despite underlying equity markets looking benign, there has been little change in investors’ underlying reticence to put money into IPOs unless the valuation is extremely compelling.

“IPOs from this year are almost all trading down, except Euro Group [BIT:EGLA] but I think a lot of that is down to index inclusion, Lottomatica [BIT:LTMC] is trading badly and IONOS [ETR:IOS] is dead money,” the investor said. “What I think is going on here is simply pushing things before the summer, nothing to do with the market being better.”

The investor said that if issuers are aggressive on valuations, then deals will struggle to attract the sort of demand needed to attract a high-quality book and trade up in the aftermarket.

The upcoming IPOs all have some idiosyncratic qualities that could make them appealing to investors. We Soda is an attractive commodity story with better margins and environmental credentials than listed peers, as this column reported on last week. Hidroelectrica and Nucera are also both clear energy transition assets that play to growing demand for green equity, and CAB Payments is a high-margin, high-growth, emerging markets FX and payments story.

But the key question, the investor said, is are they must-own assets? If they are not, then they must be priced attractively enough to make them too good to miss.

He added that We Soda would almost certainly have to move down from hopes of a double-digit EV/EBITDA multiple, as this column reported last week was its ambition, for example and that Nucera would probably price closer to a EUR 2bn valuation than the EUR 4bn it had been reported to be seeking if it decides to press ahead with an IPO. This column previously reported Nucera might have to price closer to a EUR 2bn if it were to succeed in a tough IPO market.

“Nobody wants to miss the opportunity if it makes sense,” said a third ECM banker. “If it makes sense and valuations are compelling enough on IPOs, they can jump in with both feet.

But we need that valuation for deals to trade well off the bat and once that happens that will be an indication that the market has found a level.”

Given most large IPOs have traded down significantly after pricing, some investors are switching their strategies, spurning IPOs at pricing but then buying the stock in the aftermarket at a discount, according to the investor and the third banker.

If too many investors adopt this approach, then the idea that IPOs are better bought once they have priced becomes a truism, said the third banker. EuroGroup’s dramatic recovery from trading down initially after its February IPO to now trading 20% above offer, would at first glance justify this strategy of trying to buy the stock after it has priced, although it is nigh on impossible to get the size that you would get by investing in the IPO.

Deal now

Markets are undeniably in a better spot than they have been for some time, but some of the looming threats that have undermined ECM issuance throughout the past two years remain.

As this column pointed out two weeks ago, the US Treasury is set to re-fill its coffers rapidly over the next few months following the striking of the last-minute debt-ceiling deal between Republicans in Congress and US president Joe Biden. This is expected to put a severe strain on market liquidity.

Underlying US economic data also shows inflation is still higher than many policy makers would like which could lead to more rate hikes from the US Federal Reserve.

The CME’S FED Watch predictor shows around a 78% probability of the FOMC holding rates at its meeting this week, but a small majority believe now that it will hike again in July, reversing earlier expectation that US rates had finally levelled off.

Should there be further rate hikes and US inflation data show prices are still rising at levels deemed too high, then markets may be in for a harder few months than some and anticipated.

When combined with a hiking ECB and Bank of England, plus a Eurozone recession, underlying economic conditions look weak, despite the recent equity run upwards.

For IPO issuers therefore, it makes sense to deal before the summer and stave off any potential autumn volatility, even if they feel investors are demanding more than they would like to take part in new deals.

With equity capital markets sometimes its better the devil you know.

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