BAY STREET-Second-half IPO revival hinges on commodities

Sun Aug 7, 2011 10:30am EDT

* Fresh turbulence could derail confidence

* Canadian IPOs on track for 60 pct decline this year

* Slide reflects worsening outlook for global economy

* Commodity producers more likely to go public in Canada

* Valuations based on long-term outlooks for commodities

By Pav Jordan

TORONTO, Aug 7 (Reuters) - Canada's IPO market could roar back to life in the final months of 2011 after a dismal first half -- but only if a fresh bout of global market turbulence doesn't overwhelm any revival.

So far this year, Canadian initial public stock offerings are on track for a 60 percent decline in 2011. But investment bankers say commodity producers could get the market sailing again once the summer doldrums are over.

"People are looking at the next three weeks and recognizing that the dog days of summer are upon us, and it's not necessarily indicative of the kind of robust market environment that could well exist as we get further past that August period," said a capital markets expert from one of Canada's top banks.

IPO markets thrive on healthy economies that paint sustainable growth profiles for companies going public, and Canada is no exception. Canadian IPOs virtually disappeared when global economic turmoil erupted in 2008, a year in which only C$700 million ($714 million) was raised.

The market sputtered back to life in 2009, with C$1.97 billion raised. Last year it powered ahead to C$5.5 billion as investors grew confident the global economy would not come to a screeching halt.

This year, though, the doubts returned. Canadian companies raised C$1.7 billion by going public from Jan. 1 to June 30, Thomson Reuters data shows, compared with C$3.17 billion in the first six months last year.

Bankers say the decline reflects a worsening global economic outlook, but they are not yet prepared to say if the recent market mayhem will wreck chances of a rebound in the final months of 2011.

"The volatility through the summer has created a 'lets see how this all pans out' attitude," said one banker who could not be named due to company policy.

MARKET MAYHEM

Toronto-listed stocks plunged by as much as 4 percent on Friday to their lowest since August 2010. It was the main stock index's biggest intraday drop in two years as investors weighed the enduring debt crises in Europe and the United States, and the prospects of stalled growth in the world's biggest economies.

"So now you're into 2011, and the economy is a key concern again and it is difficult to market off of that," said Neil Manji, head of national IPO services for PwC, the global M&A adviser.

"It's a mixed bag, but the overriding fact here is that volatility like this hurts markets. It hurts it from the ability to price an IPO and keep it alive."

Bankers say market turbulence will have the greatest impact on smaller companies, as investors assume defensive positions.

Mutual fund managers may keep more cash available to fund redemptions as markets bounce around, and may be less inclined to invest in an IPO, a leading banker said.

Only two IPOs with a value of C$20 million-plus have been pulled so far this year, but many companies in the process of going public are moving slowly and weighing their options.

Others are holding back, one of the reasons the IPO pipeline is overflowing with potential deals. Companies are waiting for the right moment to strike.

"I would say that looking at our list and the Street, it's one of the fullest pipelines I've ever seen for IPOs," said Peter Miller, head of equity capital markets for the Bank of Montreal (BMO.TO), Canada's fourth-largest lender.

"There are numerous transactions in the pipe over C$500 million, and some are well over."

Even so, the size of IPOs has shrunk in 2011, with the largest ones in the range of C$100 million to C$300 million. In 2010, Athabasca Oil Sands (ATH.TO) went public with a C$1.35 billion IPO.

The traditional lull in investment activity in summer makes it difficult for bankers to fully gauge investor appetite and issuer confidence in the months ahead.

Still, bankers are hopeful, basing their optimism in a second-half recovery on Canada's status as a global commodities powerhouse and the bullish outlook for energy, grains and metals.

The Toronto Stock Exchange already has more miners listed than any other, and BMO's Miller said the sector could lead the IPO market because transactions are backed by the long-term outlook for prices.

"They are based on long-term commodity forecasts, and despite the bumpiness that's going on right now, there's still a depletion of base metals and precious metals globally," said Miller. "And if you believe in the Asian story for growth, all that supports attractive long-term commodity prices."

($1=$0.98 Canadian) (Additional reporting by Allison Martell; Editing by Frank McGurty)

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