Wednesday 29 January 2020

2016: the year the IPO died?

In 2015, 14 companies completed €1bn-plus IPOs but now the market has dried up, writes Sarah McCabe. What does it mean for companies like AIB and One51?

While AIB is in good shape, it has also taken a few blows recently
While AIB is in good shape, it has also taken a few blows recently

Sarah McCabe

It looked, for a while, like the IPO was back. The volume and proceeds of companies raising money on the public markets tanked during the recession, but by mid-2015 a renaissance was well under way.

Globally, 14 different companies completed IPOs worth more than €1bn in 2015, not far off the 18 mega-IPOs completed just before the crash in 2007 (the number had dwindled to two by 2009).

Irish companies evidenced the same trend - 13 new listings have joined the Irish Stock Exchange (ISE) since 2013, with four IPOs in 2015 raising almost €1bn. This included Malin, which took in €330m in one of the largest life-science IPOs to ever take place in Europe.

Irish businesses as varied as hotel groups and petrol-station chains successfully managed to raise money on the public markets as the domestic and international economy improved. Even a house-builder, Cairn Homes, returned to the stock market for the first time since McInerney Holdings listed on the ISE in 1997.

Unfortunately for businesses with big ambitions, it was a short-lived recovery.

Globally, 2016 saw the slowest start for IPOs since 2009, with proceeds down almost two-thirds compared to the first three months of 2015.

A cocktail of factors from oil to China to migrants to Brexit are to blame, experts say.

Research by professional services group EY says the slowdown in growth in the Chinese economy, which expanded at its slowest rate in 25 years in 2015, has increased fears of a global slowdown, contributing to a drop in commodity prices, particularly oil.

Lower oil prices, in turn, have helped undermine stock-market sentiment, prompting lower and more volatile equity prices in many markets.

At the same time, political risks and uncertainty are rising in many regions. In Europe, the refugee crisis and the forthcoming EU referendum in the UK are raising questions about the political cohesion of the Eurozone.

Across the Atlantic, the looming US presidential election is clouding the outlook for both economic and foreign policy.

Further uncertainty surrounds the future course of monetary policy in many markets. The Federal Reserve is expected to increase interest rates this year, and while the ECB is still following an accommodative path, there are growing concerns that its negative interest rate policy is creating the potential for a renewed crisis in the European banking system.

Europe has been hit particularly hard. The last quarter saw "incredibly subdued IPO activity across Europe for all sectors", according to PwC.

Just 50 European companies IPO'd in the first three months of 2016 and only three exchanges hosted IPOs which raised more than €50m - London, OMX and Deutsche Borse - compared to nine exchanges in the first quarter of 2015. The Continent is still waiting for its first €1bn-plus IPO of 2016.

Many deals have been postponed - at least nine in Europe in the first quarter (16pc of all deals), compared to five (6pc) in the first quarter of 2015.

Last October there was businessman Denis O'Brien's Digicel: O'Brien called off its IPO at the 11th hour, after investors didn't meet his valuation of the business.

"Why would you sell your front garden when you know it's worth a lot of money and why would you sell at a discount?" he told CNBC.

In March, amid market turmoil, the US owners of German wind-turbine maker Senvion GmbH said they were dropping plans for what would have been Europe's biggest IPO this year. The company later raised about €300m in a private placement of shares, less than half the sum it had planned to reap via IPO.

Another example is plastics manufacturer and waste recycler One51, which this month pulled plans for a 2016 IPO after failing to secure the necessary shareholder support.

"The reasons for not supporting the resolutions were varied, from the quantum of equity we proposed, there was a pricing issue that some shareholders had and dilution issues figured on some people's minds," One51's chairman said.

Reports suggest the company's biggest shareholder Dermot Desmond was against the deal.

The biggest postponement of an Irish IPO this year will probably be AIB.

Minister for Finance Michael Noonan said last year that he would IPO 25pc of AIB's shares in 2016 if reappointed following the General Election. The sale of this stake could net the State about €3bn.

Noonan said his preference was to list the shares in the autumn on the main market in London, but there was also a potential window this spring.

Last month, the bank's chief executive, Bernard Byrne, said it was fully ready for an IPO this year, if its government owner deemed the timing right.

Now Noonan appears to be changing tack. Ireland has not made an "irretrievable" decision to go ahead with the deal this year and a final decision will be made in the early days of a new government, he said last week.

"We've been watching the markets, the markets haven't been as strong as they were last year. We'd only sell in a strong market. We want to get full value for AIB," he told reporters on Thursday.

"No irretrievable decision has been made to go ahead in the final quarter of the year but we'll have to take a decision in the early days of the new government."

Of course the Department of Finance is in no rush to sell at a discount and waste some of the money and effort that has been put into the bank, says Fiona Hayes, head of financial research at Cantor Fitzgerald.

"This sector is particularly challenged," she says. "Banks around Europe are trading at about three-quarters of their book value, largely thanks to negative interest rates and a low-yield environment.

"A quarter of an entity that is worth at least €13bn is a lot of money. You can't take chances with taxpayers' money. The bank's overriding concern will be to get the right price and that will be more important than timing. If they have to push the timing of the IPO, they will."

Irish banks face particular difficulties because when you can't grow margins, you have to grow volume - but the Irish mortgage market is completely stuck because of a lack of housing.

"And while AIB is in good shape, it has also taken a few blows recently," says Hayes. "It is facing an inspection into whistleblower allegations about whether it misled regulators about some of its loans which, even though it could be a red herring, is unlikely to be resolved until the summer. It might not be the best time for investor road-shows with that hanging over the bank."

Then there is the threat of Brexit. "About 17pc of AIB's overall loan book is in the UK, so it is sensitive to fluctuations in sterling, though less so than Bank of Ireland.

"But at the same time, 83pc of its loan book is here which gives huge exposure to the fastest-growing economy in Europe, plus asset quality is improving. There is definitely a lot of interest."

Linda Hickey, head of corporate broking at Goodbody Stockbrokers, similarly stresses the value of Ireland's recovering economy.

"Any company with a compelling story which offers exposure to Ireland's fast-growing economy will still attract interest," she says.

"There is certainly still plenty of room for good companies. Confidence comes in ebbs and flows and with the rally in the price of oil and fresh commitments from the ECB, sentiment is on an upwards trajectory."

The market will probably improve later in 2016, she believes, particularly once the dust settles on the Brexit referendum.

"This quarter has proven to be challenging for IPO activity but that's not to say we don't see a diverse pipeline for the end of 2016 and early 2017," agrees PwC transaction services partner Denis O'Connor, who also flags that Brexit will have major implications this year.

"With the EU referendum looming, uncertainties still remain, and we do not expect to reach the €10bn mark before the summer break and this reflects a return to the levels seen in the first half of 2013, before the recent boom of the last two years."

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