Over-competitive IPOs

To employ what has always been the imagery of choice when it comes to visualising the receptivity of the new issues market: the window is open. Last year, Europe's stock exchanges were host to some 44 private equitybacked IPOs collectively worth more than $13 billion (€10.4 billion), compared with four deals worth just over $2 billion two years previously (see table below). The current year's figures look set to be as strong or stronger than 2005.

And yet, consider this recent headline from London's Telegraph newspaper: “Is the IPO gravy train about to hit the buffers?” For private equity firms pondering the feasibility of market listings as a potential exit route for portfolio companies, it's a question bound to give pause for thought.

Gloomy prognoses have been fuelled by the difficulties that some new issues have been running into recently. Of the eight flotations withdrawn or postponed by private equity firms since January 2004, five have occurred since the beginning of June this year (see graphic overleaf). Among these have been Medica, the French nursing home operator backed by Bridgepoint and AlpInvest Partners, and Italtel Group, the Italian IT firm supported by Advent International, Clayton Dubilier & Rice and Brera Capital Partners.

In addition, a number of those candidates that have made it onto the market in recent months have done so only after a struggle. In October, Permira-backed UK travel group Hogg Robinson launched in London with an offer price of 90 pence per share, having previously been forced to retract an offer based on a 140 pence to 200 pence price range. In the same month, Wavin, a Dutch plastic pipe supplier backed by CVC Capital Partners, floated at the bottom of its price range and reduced the size of the offering to 33.7 million shares in the process – 13 million less than anticipated (see Shareholder shock, page 48).

There are a variety of possible reasons why an IPO might struggle to generate support, and it is difficult to identify one predominant cause with any certainty. Those involved in failed floats will often cite ‘adverse market conditions’, claims that are not always hollow. For example, earlier this year, the discovery of a terror plot aimed at transatlantic airliners in London understandably caused a wobble on stock markets around the world and listings being prepared at that time were bound to suffer.


Pricing Date by Year Deal Value ($m) No.
Q1-4 2001 1,518 9
Q1-4 2002 3,906 13
Q1-4 2003 2,148 4
Q1-4 2004 8,414 40
Q1-4 2005 13,028 44
2006 YTD 9,859 35


Withdrawn/ Issuer Name Issuer Nationality Bookrunner Financial Expected
Postponed Date Parent Sponsor Value $ (m)
27-Oct-05 Eutelsat SA France Deutsche Bank, Cinven Ltd, 1,557
Goldman Sachs, Goldman Sachs
Lehman Capital Partners,
Brothers, Merrill Spectrum Equity
Lynch, Morgan Investors, Texas
Stanley Pacific Group,
26-May-04 Auto-Teile-Unger Germany Credit Suisse, Doughty Hanson 1,200
Handels GmbH HSBC
&Co KG
21-Jun-06 Medica France Lazard-IXIS, SG Bridgepoint 620
Promesses Corporate & Capital,
Investment Alplnvest
Banking, Partners
21-Jun-06 Italtel Group Italy Goldman Sachs, Advent 420
SpA Merrill Lynch, International,
HVB/UBM Clayton Dubilier
& Rice, Brera
Capital Partners
4-Nov-04 Teamsystem SpA Italy Citigroup Palamon Capital 402
19-Jul-06 LaNetro Zed SA Spain Goldman Sachs, Apax Partners, 263
Merrill Lynch, Inversiones
Lehman Ibersuizas,
Brothers, Torreal
Morgan Stanley
3-Jul-06 Wacker Germany UBS, Deutsche Lindsay 126
Construction Bank Goldberg &
Equipment AG Bessemer
10-Jul-06 Diatos SA France KBC, SG 34
Corporate & GIMV –
Investment Gewestelijke
Banking Investeeringsmaa
tschappij voor
Credit Agricole
Private Equity

One leading European corporate financier neatly summarises why competitive IPOs still have an appeal in spite of the risk of failure: “Until you've tried it, you don't know whether it will work. And if it doesn't work, you can always bring the price down.”

This approach is far from optimal with respect to time and cost – and arguably reputation also. As the same corporate financier says: “Bringing the price down a number of times after initial IPO failures due to mispricing is probably more damaging than being more realistic.” But are there any alternatives to the competitive IPO if your primary motivation is to maximise the price?

Paul Cartwright, a managing partner at UK turnaround investor Rutland Partners, would argue that there is. Of the firm's IPO of pawnbroker H&T Group on the AIM market in May 2006, he says: “We didn't run brokers in competition. Instead, we got a firm commitment from one broker regarding the price and asked them to go to the market and get commitments based on that price within two weeks. It was an extremely tight window, and we picked the broker that was prepared to do it.”

One question worth pondering at this point is whether seeking to maximise the initial valuation is, in any case, the most effective strategy. Some say a better approach would be for private equity firms to sell fewer shares at a less demanding price, and then wait for the company's growth story to unfold (and impact positively on aftermarket performance) before selling months or even years down the line.

This does, however, go against the grain of a GP's natural inclination to try and exit as much as of its investment as possible through the IPO. The view will often be that it's better to accept a significant reduction in the hoped-for price and get jam today rather than be locked into a quoted holding for an indeterminate period.

But Rick Thompson, head of corporate finance at London stockbroker Charles Stanley, says this does not preclude the possibility that GPs might be better served by some kind of compromise position that liquidates the majority of the holding while retaining some skin in the game. “There's nothing to stop a GP from saying ‘we like this story. Even though the quoted market isn't our normal arena and we don't want to retain a big slug of 30-40 percent, what's to stop us from holding 10 or 15 percent’?”

Adds HgCapital's Armitage: “You can indeed sell rubbish into a hot market but then you can't get your stock out in the after-market. This is a fool's errand. When you list a firm, you should be thinking in terms of the IPO as a means to an end, not an end in itself. We like to see at least two years' solid growth in the investment.” HgCapital has had some favourable experiences in this regard. For instance, Raymarine, the marine electronic product business floated by the firm in December 2004, had increased its share price to 144.5 percent by September 30 2006, outperforming the FTSE All Share index by 114.9 percent during that time.

There again, growth stories such as these are more symptomatic of companies floated on bear rather than bull markets when, in the words of Grégoire Revenu, a managing director at Bryan, Garnier & Co, a European boutique investment firm: “Investors return to basic fundamentals to determine the offering quality. Investors are just more careful about what they invest in”. This claim appears to be borne out by Bryan, Garnier data showing that only 22 percent of companies that floated globally in the bullish IPO years of 1999 and 2000 are currently trading above their offer prices, compared with 69 percent that listed during the far more subdued IPO period of 2001 to 2003.

Attempting to read where European IPO markets are currently positioned in the cycle is no straightforward exercise. It could be argued – and is by some – that recent difficulties in getting floats away have indeed been exacerbated by adverse market conditions. But even if that is so, there are some fairly strong signs that this was only a blip. In the UK, where few obvious signs of nervousness are afflicting the market, the FTSE 100 recently reached its highest level since 2001 and is forecast to continue rallying until at least the end of the year.

In this environment, it would be tempting for private equity firms to continue testing valuations to the limit. Of course by doing so, relationships with institutional investors might eventually become strained (if they're not already). There again, flotations have only ever been a relatively small proportion of overall private equity exits (see graphic p. 48). To put it bluntly, does private equity's relationship with the stock market really matter that much?

The reality is that it matters a great deal, not least because, with respect to public-to-private buyouts, these same institutions are also an important source of new deals for private equity firms. In addition, it is not far-fetched to imagine the IPO becoming a rather more significant exit route in the years ahead as other options decline. For example, the current refinancing boom will presumably not last forever as the price of debt edges up.

What is more, as assets acquired by private equity firms grow ever larger, one would assume a point is reached where only the stock market is capable of absorbing them (think HCA in the States, for example). Those looking to soon divest companies that are too big for a trade sale would seem well advised to maintain good relations with the public market.

Private equity, it seems, has a new battle to fight in the public relations war. Politicians and trade unions have been the most vociferous critics of financial buyers to date, frequently lambasting the industry for its short-term focus and asset stripping tendencies, among other alleged misdemeanours. With the recent IPO of the Netherlands' Wavin Group, backed by European buyout house CVC Capital Partners, a new constituency in need of pacifying has emerged: the shareholder association.

Wavin, a plastic pipe manufacturer that supplied irrigation systems for Berlin's Olympic Stadium, suffered a disappointing introduction to the Euronext Amsterdam market on October 12. The company's shares listed at €11 each, at the bottom of its €11 to €13.50 price range, and, due to a lack of demand, the size of the offering was slashed to 33.7 million shares, 13 million less than anticipated.

In identifying reasons for the slack take-up, observers say the intervention of the Vereiniging van Effectenbezitters (VEB), a Dutch shareholder association, was undoubtedly a factor. According to a report in the Financial Times, the VEB had proclaimed that Wavin's listing would carry “above average risk” because of what it described as the company's “fragile financial position”.

Relates Robert ten Have, an Amsterdam-based partner in the corporate group of law firm Freshfields Bruckhaus Deringer: “The VEB put out advertisements warning about the weak balance sheet of Wavin. They questioned the high leverage and asked where the upside was. The company, for its part, said investors should consider that its balance sheet would be improved by the IPO.”

In the event, remedial action was indeed applied to the Wavin balance sheet a week after the listing when, on 19 October, it announced the signing of a new €750 million credit facility with ABN AMRO, Fortis, ING and Rabobank that Wavin financial director Pim Oomens claimed had “significantly improved its financial position”.

But by then, the damage had already been done to Wavin's fiscal reputation. Sources close to the IPO express the view that, while non-Dutch institutions continued to support the float (albeit not at the price level wished for by the issuers), many domestic institutions turned their backs on it. Opines once source: “The Dutch institutions said it was too expensive. But perhaps they just didn't want to be associated with any adverse publicity.”

While the VEB almost certainly helped shape opinion, it is important to consider that there were other sensitivities lurking in the background. Notes ten Have: “The role of private equity in the Dutch economy was already being challenged, although the debate was a bit confusing since the criticism was really about activist shareholders. Unions and politicians had come forward to say the influence of private equity and hedge funds on companies was not in the best interests of employees. Wavin went public with that debate still raging.”

A further sensitivity was that CVC acquired part of its stake in Wavin from public ownership. Having initially bought a 45.75 percent interest in the company from Royal Dutch Shell in 1999, the private equity firm then bought a further 34.25 percent last year from the regional government of Overijssel and its 24 municipalities – introducing an additional €325 million of new debt to the business at the same time.

While bulky leverage on the balance sheet per se is viewed as a far from desirable trait by the likes of the VEB, it appears all the less savoury when viewed in tandem with the delivery of outsized profits. The return made by CVC from the flotation, in which it was reported to have sold shares equivalent to a stake of around 35 percent, was not disclosed. However, a source says that, had the business floated at the upper end of its mooted price range, it would have represented a triple-figure IRR.

In pure financial terms, CVC would not have been disappointed, despite the eventual outcome not scaling the hoped-for heady heights. But such a canny investor will not have failed to notice that, in the process of taking Wavin to the public market, a new front opened up in private equity's public relations campaign.