European IPO market poised for recovery

LONDON Thu Jan 14, 2010 11:54am EST

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LONDON (Reuters) - Bankers hoping for a $40 billion IPO bonanza this year face a double threat; investors scared off by the performance of previous offerings and owners opting for a trade sale or hanging on for a bigger pay day.

One-third of the top 15 initial public offerings in Europe last year are still trading below water.

But bankers are increasingly confident that Europe's IPO market will take off this year and may deliver as much as five times capital raising as in 2009.

Five bankers told Reuters they expect Europe's IPO market to reach about $40 billion as market volatility recedes and economic growth returns.

This week alone, five companies launched or started marketing their offerings in Europe, setting a good pace for the year.

"The outlook for transactions is quite encouraging," said Nick Williams, head of EMEA equity capital markets at Credit Suisse.

The flotation of Russia's United Company Rusal was fully subscribed by institutional investors on the third day of its bookbuilding process.

"Global economy is recovering far stronger than analysts had expected. The IPO market is a way to increase our exposure, when the valuations are right," said George Godber, a fund manger at Matterley.

Together with French nursing home Medica, UK banking group Walton & Co., Belgian chemical firm Taminco and Germany's Helikos, the five IPOs should raise almost $4 billion in aggregate -- equivalent to half of last year's total volume of $7.9 billion, according to Thomson Reuters data.

Bankers are busy pitching, in hopes that offerings from private equity owned portfolio companies and emerging markets could push the volume to a level seen in 2004, when the IPO volume reached $37.1 billion.

And there is a good mix of candidates in the pipeline, ranging from Russia's top steam coal producer SUEK, to Czech Republic's CSOB, theme park operator Merlin in Britain and travel firms Amadeus and Travelport.

BITTER MEMORIES

A bitter memory from the past, though, could dampen the enthusiasm -- some of the biggest IPOs from the last boom cycle of between 2004 and 2007 are still trading way below their offering prices.

Shares of Russia's state-owned Bank VTB (VTBR.MM)VTBRQ.L, the biggest IPO in 2007, for example, have slumped more than 50 percent, while Debenhams (DEB.L) shares nosedived over 60 percent since their market debut in May 2006.

More recently, at the end of last year, investors showed they were not pushovers by forcing Gartmore to cut its IPO price range and rejecting the share sale of German's Hochtief Concessions.

"It's not a nice gentlemans' relay race. It's investors passing a ticking time-bomb from one to another," said Andy Smith, a fund manager at AXA Investment Managers.

"Investors are still digesting the horrors of the last round of European IPOs," he added.

To go through the quality checks and screens of potential equity investors, IPO hopefuls need to get their valuations and debt levels right.

"It would still be tough for IPOs to get very aggressive prices, particularly if they are highly indebted or have big private equity backers who are selling," said a London-based fund manger.

A NEW WORLD

"Some equity investors think they may have overpaid in the last IPO cycle, and are quite keen not to overpay this time around. On the other hand many private equity firms think it may be too early in a cycle to exit," said Craig Coben, head of EMEA equity capital markets origination at Bank of America Merrill Lynch.

"Investment banks need to help bridge that valuation gap," he added.

Bankers said private equity firms had changed their approach now, with many looking at an IPO as a mechanism to reduce debts for their portfolio companies rather than an imminent channel to exit.

BC Partner BCPRT.UL and AXA Private Equity (AXAF.PA), for example, are only selling secondary shares in Medica if an over-allotment option is exercised, using most of the IPO proceeds to cut debt.

As investors look to increase their weightings in equities, large, liquid IPOs would help.

"We are in a new world a year on from the midst of the crisis. IPOs by definition can have more risk, but they can also offer compelling opportunities for alpha and outperformance," said Williams at Credit Suisse. (Reporting by Daisy Ku; Editing by Rupert Winchester)

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