A few large transactions and stellar after-market performance by some flagship deals are masking deeper unease in parts of Europe’s IPO market.
IPOs in October of more than $3 billion-equivalent by Poste Italiane and Worldpay – and multi-billion euro deals in November from French asset manager Amundi and ABN Amro – have helped bring a strong finale to 2015 volumes. By mid-November, European IPO volumes were set to equal or surpass 2014’s $71 billion, in contrast to a downward trend in the US.
Despite pricing at 33 times forecast 2016 earnings, Worldpay’s stock rose almost 20% on its IPO level in its first month, while Amundi’s shares also rose on its first day of trading. “Europe is benefitting from quantitative easing, which is helping secondary market values,” says Gareth McCartney, head of equity syndicate for EMEA at UBS. “On a relative yield basis, equities are still attractive.”
According to fund flows data provider EPFR, retail flows to European equity funds passed $40 billion in the six months to end-October, compared to $56 billion of outflows from regional fixed income funds. Below the headline IPO volumes and flagship deals, however, data from Dealogic shows secondary market performance has fallen behind achievements earlier in the year, and more deals are getting withdrawn, postponed, or priced below their range.
Martin Thorneycroft, head of European equity syndicate at Morgan Stanley, points to seasonal factors. “Investors start each year looking to generate outperformance and are more inclined to invest in IPOs to achieve it,” he says. “Towards the end of the year, investors have a tendency to look to preserve their year-to-date performance, and we see this reflected in a more cautious approach to IPO investing.”
Large issuers seeking to complete transactions in the fourth quarter may have contributed to a particularly acute case of ‘end-of-year IPO fatigue’ this year, he says. IPO volumes in October surpassed the previous 2015 monthly peak in February. “We have not observed any more structural fatigue in terms of the overall level of supply,” says Thorneycroft.
Thanks to the large size of the biggest deals, volumes between September and November comfortably surpassed the same period last year. There are even signs, say bankers, of more late-cycle issuers, like industrial, manufacturing and construction firms. UK brick maker Ibstock priced a £770.5 million IPO in late October. “There will be more names like that next year,” says McCartney.
But the end-of-year aside, global worries (manifested in the China-induced August sell-off) are contributing to the increased difficulties some issuers have encountered since September, says Tomas Pinto, co-head of European equities at Pictet Asset Management in London. Poste Italiane, which traded slightly down on its first day, was only marginally overpriced, according to Pinto. “If Poste had happened early in the year, it would have been great – Italy was in demand,” he says.
At around 15.2x earnings – one standard deviation above average for the past three years – European equities remain cheap by comparison, at least, to government bonds, according to Jeff Meys, equity portfolio manager at NN Investment Partners.
But compared to September and October last year – when deal numbers were similar, volumes might otherwise indicate a more circumspect market – the number of $100 million-plus IPOs that traded down on their first day was slightly higher in the same period this year. Aside from Poste Italiane, the €1.16 billion IPO in late September of German digital classified adverts firm Scout24 is another example.
Covestro’s €1.5 billion deal, in the German chemicals sector, and sub-$500 million deals by German transport group Hapag Lloyd and UK insurer Hastings, were among those that joined a post-summer rise in IPOs pricing below their range. Amundi priced at the lower end of its range.
From September to the first half of November, 16 issuers – more than the same period last year – had to pull deals. In the first three months of 2015, only seven deals were pulled. Those pulled in the autumn include a €600 million IPO of German construction materials group Xella, a €440 million Italian Reit IPO, a €300 million IPO of French music streaming firm Deezer and the £150 million IPO of Acacia Pharma.
An IPO of German meal delivery firm Hello Fresh was also put on the back-burner in November – bringing back bad memories of the €1.7 billion IPO of its owner, Rocket Internet, which fell 13% on its first day of trading in October last year.
Rocket Internet’s IPO was the biggest deal in the second half of last year, but in 2015 the average deal size has increased, especially since September. The jump in the average size of the five biggest deals is particularly noticeable, rising from around $2 billion in 2013 and 2014, to more than $3 billion in the year to mid-November.
McCartney at UBS says bigger deals are faring better as they can more easily attract the attention and understanding of US investors, which he says are rebalancing portfolios towards Europe, while overall flows on the buy side have been more in the direction of global funds due to the past underperformance of regional funds. Liquidity has become a more important concern, he says: “For smaller deals you need to be especially sure which funds are going to come into the book.”