Despite a few deals, global IPO market still stuck

NEW YORK/HONG KONG (Reuters) - It will take more than a handful of successful initial public offerings to get the global machine for new listings humming again.

Lower valuations, a focus on follow-on stock issues and risk aversion in global markets that remain volatile preclude a flood of new issues anytime soon, bankers said.

Yet signs of life in the IPO market emerged last week in China and the United States.

Chinese on-line gaming firm Changyou.com (CYOU.O) raised $120 million on Nasdaq and Silver Base Group (0886.HK), a liquor and cigarette distributor, raised $133 million in Hong Kong in oversubscribed deals.

And two U.S. companies, language instruction provider Rosetta Stone Inc (RST.N) and college operator Bridgepoint Education Inc(BPI.N), set dates to price their IPOs next week.

"There is interest and there is appetite. We now have an engaged buyside," said Steven Barg, head of global capital markets for Asia at UBS (UBSN.VX).

But to entice investors, issuers and underwriters will have to price their IPOs conservatively and demonstrate a record of growing profits.

"While we have found a bottom, the global economy is still incredibly fragile," Barg added.

That fragility had shut the IPO market. Deal volume in dollar terms is down 96 percent so far in 2009 globally. Europe has seen only one IPO, while there have been none reported in Brazil or Canada, according to Thomson Reuters data.

PRICED TO SELL

The most recent IPOs, Changyou.com, pediatric food producer Mead Johnson Nutrition (MJN.N) and Grand Canyon Education Inc (LOPE.O), still trade above their offering prices because they were priced strategically, bankers said.

"A lot of bankers would say the value proposition has to be larger than in a normal market," said Mark Hantho, head of equity capital markets for the Americas for Deutsche Bank. (DBKGn.DE)

Ideally, an IPO should be priced to get a first day "pop" of about 20 percent in a down market, and 10 percent normally, Hantho and other bankers said.

Still, companies trying to spark demand for their IPO by limiting the size of their issue might be taking a risk, said Dan Cummings, co-head of equity capital markets for the Americas at Bank of America Merrill Lynch. (BAC.N)

"Investors are still very focused on liquidity and want to be sure they can trade the IPO stocks," Cummings said.

It comes as little surprise that China and the U.S. are the first to see signs of recovery, bankers said.

"The places where one might see IPO activity rebound most quickly will be those where the economy rebounds more quickly due to government stimulus packages - such as China and the U.S.," said Jeff Bunzel, managing director for equity capital markets with Credit Suisse. (CSGN.VX)

Infrastructure, healthcare and education are widely cited as the first sectors that will benefit when IPOs come back.

China has vied with the United States for preeminence in IPO volumes and topped global league tables in 2006 and 2007.

Late this year or in 2010, the next mega-listing from the mainland is expected with the IPO of Agricultural Bank of China. It would be the last of the "Big Four" Chinese state banks to go public.

Once market volatility recedes, U.S. investors will start looking at riskier stocks again, Cummings said.

"U.S. investors have an appetite for growth and understand earlier-stage companies and finance them," he said.

MORE FOLLOW-ONS FIRST

Globally, follow-ons, or additional issuance by already public companies, are up 44 percent so far in 2009 over last year to $86.4 billion, or 52 times greater than IPO volume, driven by big rights issues like the $19 billion offering this week by London-based HSBC Holdings (HSBA.L)(0005.HK).

"Companies are looking to bolster their balance sheets and get the capital they need," Bunzel said.

But when follow-ons do well, they can spur IPOs.

"Follow-on stocks are up 8 percent worldwide so far this year, so it helps the psychology," Hantho said.

All these signs of progress are prompting bankers and issuers to test the IPO waters.

"People are dusting off their deal pipelines and thinking much more closely about what ones could work," Simon Aird, managing director, head of equity syndicate, Non-Japan Asia at Credit Suisse.

(Reporting by Phil Wahba in New York, and Tony Munroe in Hong Kong; additional reporting by Jeff Hodgson in Toronto, editing by Leslie Gevirtz)