September 14, 2017 / 3:15 PM / 3 months ago

Fund investors deflate tyremaker Pirelli's IPO price hopes

MILAN/LONDON (Reuters) - Tyremaker Pirelli has given up on what sources say was an initial valuation goal of 9 billion euros ($11 billion) ahead of its return to Milan’s stock market next month, after several fund managers baulked at paying such a lofty price.

The maker of Formula 1 racing tyres said on Thursday its owners would sell up to 40 percent of the company within a price range of 6.30-8.30 euros per share, giving it a valuation of between 6.3 billion and 8.3 billion euros.

Controlling shareholder China National Chemical Corporation (ChemChina), which took over Pirelli two years ago and delisted it, and two other shareholders had been looking for a premium valuation of up to 9 billion euros, sources familiar with the matter have said.

However, fund managers raised doubts, citing Pirelli’s relatively high debt, complex governance structure and risk that the share price could be hit by a wave of selling once a lock-up period for one of the existing minority shareholders expires.

At the top of Pirelli’s price range, ChemChina and the two minority shareholders will raise up to 3.3 billion euros in the IPO, assuming Pirelli’s bankers take an over-allotment. That would make it Europe’s second largest offer this year behind the 3.4 billion euros raised by Allied Irish Banks ALBK.I in June.

The price range represents a multiple of 11.3-14.9 times Pirelli’s forecast 2018 earnings, according to estimates published by Banca IMI, a global coordinator for the IPO. Banca IMI valued Pirelli at between 7.6 billion and 8.7 billion euros.

But four Italian fund managers said the group was worth 6.6 billion to 7.5 billion euros, or 11.9-13.5 times 2018 earnings.

That would put Pirelli above rival tyremakers Michelin (MICP.PA) and Continental (CONG.DE) but short of the industry’s most highly valued manufacturer, Finland’s Nokian (NRE1V.HE).

Angelo Meda, head of equities and portfolio manager at Banor SIM, which manages 4.8 billion euros in assets, trimmed his maximum valuation after the price range was released.

“I am not going to buy it if it’s valued at more than 7 billion euros,” he said.

One large London-based investor who has looked at Pirelli’s offer said the group was a good business but questioned whether it deserved a premium valuation.

Pirelli declined to comment.

Giacomo Tilotta, portfolio manager at AcomeA SGR, also cut his valuation, saying Pirella was attractive at around 6.6-7.0 billion euros compared with 7.0-7.5 billion euros previously.

He said debt was the main reason why the company should not carry a hefty premium over peers. Pirelli’s net debt is 3.1 times estimated 2017 core earnings, compared with 0.8 times for Michelin in the first half of 2017, while Nokian is cash positive.

VALUATION DEBATE

Pirelli, established in 1872 and one of Italy’s best-known corporate names, said it would list in the first half of next month. It is expected to set a listing date of Oct. 4.

The company markets itself as a premium tyremaker focusing on upmarket consumer tyres. The group’s less profitable truck and industrial tyre business is being retained by ChemChina.

Banca IMI said in a study that Pirelli warranted a valuation above its direct peers’ average 2018 earnings multiple of 11.1, citing its “superior financial profile and higher expected earnings growth”.

    Shares in rivals Continental and Michelin sell on a 2018 earnings multiple of around 11, according to Banca IMI. High-end winter-tyre manufacturer Nokian Tyres (NRE1V.HE) commands 15.7.

    “Pirelli is at the forefront of a trend for fitting vehicles with larger and larger tyres, but it’s not a protected niche,” said the London-based investor.

    “Other tyremakers are making in-roads into this market, which might erode its profit margins as competition heats up,” the investor added.

    A person familiar with the matter said more than 700 potential investors in Europe, Britain and the United States had expressed an interest in the IPO, which is being marketed by nine Italian and foreign investment banks, led by global coordinators Banca IMI, JP Morgan and Morgan Stanley.

    State-owned ChemChina holds 65 percent of Pirelli’s sole shareholder, Italy-based Marco Polo, through a Luxembourg-based firm. Pirelli boss Marco Tronchetti Provera and banks UniCredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI) hold around 22 percent of Marco Polo via a holding company. The rest is held by investment fund LTI, linked to Russia’s Rosneft (ROSN.MM), which has a lock-up period of 180 days after the IPO.

    The person familiar with the matter said Rosneft had never said it would sell out, while another source close to the deal said Rosneft’s post-IPO stake would be small.

    ChemChina will remain the biggest shareholder after the IPO, with around 40 percent, though Pirelli has said most of its directors will be independent and that Tronchetti Provera will play a key role in picking his successor in 2020.

    Banca IMI gave Pirelli an enterprise value of up to 12 billion euros, including net debt of 3.36 billion euros.

    Two years ago, when ChemChina bought the business and delisted it, Pirelli had an enterprise value of roughly 8.3 billion euros, though that included the industrial tyre division.

    “Now that the company is a bit smaller they are seeking an enterprise value of up to 12 billion. That’s too much,” said Meda.

    Additional reporting by Agnieszka Flak in Milan; Writing by Silvia Aloisi; Editing by Mark Bendeich, Greg Mahlich

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