String of cancelled US IPOs points to M&A revival
Normally, cancellation of IPOs is a sign of market nervousness, but a record-breaking spate of pulled US deals this week hides far more positive signals
In November, 12 SEC-registered IPOs, which had been expected to raise $6.4 billion between them, were withdrawn in the US equity capital markets, the highest monthly volume on record for withdrawn deals, according to Dealogic.
Partly, that shows how individual IPO deal sizes have grown larger, with the pulling of a handful of deals in the final week dominating the total. However, even by number of deals withdrawn, it is an eye-catching total. Twelve withdrawn deals in a month is the highest since 18 IPOs were withdrawn in December 2008, when markets were staring into the abyss as the failure of Lehman sparked a seizure in financial flows that quickly led to recession in the leading economies. However, this time around, the string of cancellations might not be such a worrying signal. The pulling of several of these IPOs follows the completion of successful sales through M&A transactions instead by vendors that had been following a twin-track route to realize investments. So, when Archstone Inc withdrew its expected $3.45 billion IPO on November 26, this marked the largest withdrawn SEC-registered IPO on record. However, on the same day, Equity Residential and AvalonBay Communities announced the acquisition of Archstone for $16.3 billion, including debt.
What’s more, the acquirers each raised equity for the deal through pricing accelerated bookbuilds on November 28. AvalonBay Communities raised $1.9 billion, the fourth-largest SEC-registered Reit deal on record, while Equity Residential raised $1 billion.
Also on November 28, PlainsCapital Corporation, a Dallas-based mortgage banking group with $6 billion in assets, formally withdrew its $225 million IPO. This had become redundant after Hilltop Holdings Inc, a Texas-based investment company specializing in insurance, received regulatory approval to acquire the bank.
Ute Energy Corp, the Denver-based oil exploration company, also withdrew its expected $225 million IPO in the last week of November, following its acquisition by Canadian oil and gas company Crescent Point, which raised $800 billion of equity through a bought deal to finance the purchase.
Meanwhile, market sources did blame investor nervousness over excess capacity in the fracking business for oil and gas-field equipment-maker FTS International withdrawing its ambitious plans for a $1.2 billon IPO.
Investment bankers’ hearts will rest a little easier at the news that most of these cancelled deals arise from resurgent M&A interest.
It has been a reasonable 11 months for IPOs in an otherwise generally subdued global equity capital market. Dealogic tracks overall global ECM volumes roughly flat compared with last year’s 11-month total, but with IPO volumes up by nearly 12% globally.
Renaissance Capital, the US broker-dealer, suggests investors in US IPOs have enjoyed nearly 16% returns this year, with average first-day pops of 14%. That compares with 10% losses on IPOs last year and marks an impressive rebound from the Facebook disaster that threatened to close the US IPO market down in the second quarter.
Renaissance Capital tracks the volume of capital raised through US IPOs in the first 11 months of 2012 running at $41.4 billion. That’s 26.5% ahead of the $32.7 billion raised in the first 11 months of 2011.
What are the prospects for next year? Strategists at Goldman Sachs, a leading M&A adviser, expect a gradual increase in M&A that might present more concerns to credit market investors than to equity investors. They state: “The mirror image of stronger growth and slower private-sector deleveraging towards the end of 2013 and into 2014 is an increase in corporate investment and activity, and a gradual deterioration in balance sheet fundamentals.”
UBS market strategists see potential for money flows into equity, despite continuing macro uncertainties. “Equities have one key valuation support in this world of zero-to-low interest rates: dividend yield,” they state. “The yield on global equities compares favourably to that on cash, core government bonds and parts of credit.”