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"It will be a while before companies can start using the buyout market to secure tension for an IPO again"
Rupert Hume-Kendall, Merrill Lynch |
For much of the past couple of years, ECM bankers have had to sit on the sidelines as IPO mandates slipped through their fingers as companies opted instead for sales to private equity buyers. The current weakness in the credit markets, which is making life difficult for leveraged buyouts, has, however, turned the tables.
In October, Cadbury Schweppes announced that it planned to spin off its US beverage unit, the maker of Dr Pepper and 7 UP, after a seven-month search for a buyer was derailed by the credit market crunch.
Analysts had expected private equity companies to offer as much as $15.79 billion for the unit but a proposal turned down by Cadbury from a consortium including Blackstone and Kohlberg Kravis Roberts offered only $14 billion and required Cadbury to finance a third of the deal itself.
UK-based Cadbury, the world’s largest maker of confectionery and non-alcoholic beverages, will now list its Americas beverages division on the New York Stock Exchange in an IPO that is expected to value the company at $11.13 billion.
"It will be a while before companies can start using the buyout market to secure tension for an IPO again," says Rupert Hume-Kendall, chairman of ECM at Merrill Lynch. "This is because the financing conditions for highly leveraged secondary buyouts is still complicated. As a result, the IPO option has come to the fore. If companies or sponsors want to get out of assets and want to do it quickly then the equity market can offer that route."
Equity investors have remained open to new deals despite the credit crunch, easily covering even the biggest deals, such as Fortis’s €13.4 billion rights issue, Europe’s largest ever equity sale and other large deals, including the €3.45 billion rights issue of Criteria Caixa, a holding company for Spanish bank La Caixa’s industrial share portfolio.
Although they seem to have the cash in their pockets, investors are becoming more tight-fisted, wanting to make sure that enough value is left on the table when the price is set. Several deals, including Criteria Caixa, priced at the lower end of the range, while in the US, hedge fund Och-Ziff was forced to scale down its ambition to raise $2 billion to just $1.2 billion.
"Sentiment has been stirred up and this has led to more price sensitivity than usual," says Hume-Kendall. "There are ups and downs in any market caused by certain dislocations but overall fundamentals don’t just change overnight. Sentiment is much more dramatic than fundamentals and the fundamentals for the equity market are still relatively good. Some trades have been pulled but that always happens whenever you turn from a seller’s market to a buyer’s market. You can’t do any transaction at any price because investors are going to drive a hard bargain but an appropriately priced transaction, like Fortis, will attract a normal level of demand."
With a strong pipeline of IPOs to get done before the end of the year, including a €3.5 billion to €5 billion deal for Iberenova, the renewable energy division of Spanish utility company Iberdrola, bankers and companies will have to remain cautious on pricing to avoid disappointment and spooking the market with a large failure.