The lights are out, Europe’s 2023 IPO grand prix has started, but a stuttering display by frontrunner IONOS [ETR:IOS] has tempered some of the enthusiasm around new listings. While some sellers are keen to accelerate IPO timetables, the European market remains challenging, with buyers determined to push back on prices.
The listing of the German web hosting firm, owned by United Internet [ETR:UTDI], came under scrutiny from investors from the start.
Buyers felt the company was shooting too high on its initial valuation hopes, reported to be around a EUR 5bn market cap, which would have valued IONOS at a similar EV/EBITDA ratio to larger US web hosting firm GoDaddy [NYSE:GDDY].
IONOS met early resistance from the buyside and in the end had to price its IPO at a EUR 2.6bn market cap valuation. Even that was deemed expensive by many, with one ECM investors saying it still did not come at a cheap enough multiple compared to its listed US peer.
The share price has fallen by over 10% from the IPO price of EUR 18.50 a share, the bottom of its initial price range, and investors are pointing to the performance as proof that many are not getting the message on valuation concerns.
“I feel like a broken record,” said a second ECM investor, citing a misalignment between issuer expectations and what investors were willing to pay from the beginning of marketing.
“We are still at a stage where sellers can’t properly price IPOs,” he added.
IONOS was joined in the market in 1Q by Italy’s EuroGroup Laminations, a components maker for electric motors, which sold its story off the basis of being a key player in the growth of the electric vehicles market.
While EuroGroup was able to price around the middle of its IPO range at EUR 15.50 it still took a hit on its valuation hopes and has traded largely flat to issue price.
It’s the alpha, stupid
Before the pricing of IONOS and EuroGroup, bankers were talking confidently about IPO processes being accelerated to take advantage of a benign market environment in the first half of the year.
Rising equity indices may have given sellers an inkling that they could push a little more on valuations, something investors have now roundly rejected.
“Maybe even if indices have been up, market sentiment is still low and investors are biased toward certain companies rather than others,” said an ECM banker, who worked on the IONOS deal.
Investors are clear that they want to see new listings heavily discounted, they have to be a ‘no brainer’ as one buysider previously told ECM Pulse.
European bankers only have to look back to the handful of deals last year that did come to market to see a better pricing dynamic at play, including the blockbuster flotation of Porsche [ETR:P911] in Frankfurt, which was deemed to be priced at a far more conservative multiple than seller VW [ETR:VOW3] might have pushed for in a better market.
“I guess it is still a buyer’s market and there is now scope for price adjustment like what happened with Porsche,” said first banker.
European IPOs priced from the beginning of 2022 have generated a weighted return of over 37% for investors, according to Dealogic data, notwithstanding the over 10% drop in IONOS’ share price since pricing; IONOS is now one of the worst performing listings since the beginning of 2022 on a weighted basis.
However, the more conservatively priced European deals of 2022 have produced alpha for investors, outperforming IPOs in the Middle East and North America over the same period as well as established European and US benchmarks.
They have also outshone the class of 2021 which have generated a weighted loss of around 26% for investors from pricing date to the beginning of this week.
A second banker said that long-only investors were barely engaged with the IPO market and that deals were likely having to rely more on hedge funds.
A third investor confirmed scepticism around IPOs among long-onlies who remained “very scarred” by their experiences from 2021, with many large institutional investors stuck with large illiquid chunks of stock from IPOs that have severely underperformed.
Time to speed up or slow down?
Before the pricing of IONOS and EuroGroup ECM bankers were pitching the possibility of speeding up several IPO candidates to price in the first half of 2023.
Last week this news service reported that Italian gambling company Lottomatica had been taking meetings to accelerate its IPO plans, for a listing in the first half. And there are other issuers, particularly in the electric vehicle sector that are said to be looking to do the same.
However, the disappointing start to the IPO year could temper some of those plans.
“We had [a] couple of IPOs, mixed performance, which means we are not going to be seeing a huge pipeline in first quarter,” said a third banker.
This is undoubtedly an inflection point for issuers.
An IPO is often clumsily compared with an oil tanker but there is truth that it takes significant momentum to get one to the starting line.
If issuers are accelerating deals to price in the first half they have to be making those calls around now.
A fourth banker was still hopeful of some strong deal activity in the first half of the year adding that it was still early to diagnose the fortunes of either IONOS or EuroGroup.
However, he noted that the fortunes of both EuroGroup and IONOS showed that investors’ preference is still to avoid technology assets and to focus on more defensive plays, particularly if they have an equity story around electric vehicles or energy transition.
But as all European ECM veterans know the IPO market is an emotional beast, often guided more by sentiment than fundamental qualities of individual issuers.
This year has started off on the wrong foot.
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