Guy Hands’ failed flotation will increase market unease

 
David Hellier
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With an impeccable sense of bad timing, PwC’s capital markets team dispatched a piece of research during the week claiming that Europe’s markets for Initial Public Offerings (IPOs) gained momentum in the second quarter of the year, building on the progress made at the start of 2013.

While that much may be true, PwC’s research coincided with news that, only hours before, Guy Hands’ Terra Firma, had grudgingly decided to pull the float of Germany’s largest residential property company, blaming persistent adverse market conditions.

The pulling of such a large deal in Europe can be debilitating for the morale of the market as a whole, especially one where confidence is wafer thin.

So far this year the European IPO market has witnessed the flotation of companies in relatively established sectors, such as estate agency or insurance or postal services. Investors have generally been attracted by sensible pricing, with bankers happy to take heed of the views of those like Andy Brough of Schroders, who argues all IPO investors need a bargain to draw them in.

Such an attitude towards restrained pricing has definitely helped restore confidence generally in the markets. According to PwC’s research, the post IPO performance of the private equity-backed IPOs (ones which hitherto had a poor reputation for post flotation price performance) in 2013 has been encouraging, particularly in London where they have achieved significant gains on the IPO price since listing and have also outperformed the FTSE index.

Elsewhere in Europe, with the exception of a couple of companies like Moleskine and Evonik, the majority of private equity backed IPOs have held their price since listing.

The failure of Deutsche Annington’s £660m float started to become clear by Tuesday afternoon when the size of the deal was reduced amidst a shortage of investor demand. Whilst the size of the deal came down the agreed price didn’t and an intransigence on the part of the seller is no doubt one reason for there being no deal. But bankers have also described the whole European process of completing an IPO, which in Europe takes generally four weeks from start to finish, as being too cumbersome.

It is probably too soon to know whether the failure of Deutsche Annington will colour prospects for the third quarter of the year rather than the gradual recovery of the markets during the first half. Those trying to float the Royal Mail and shares in Lloyds Bank will be looking on that much more nervously than they were a week ago, though. That’s for sure.

david.hellier@cityam.com