Companies seeking to launch on Europe’s stock markets are giving up on the process unusually often, reflecting a sickly environment for listings and wobbly confidence among investors.
This year 14 new listings across Europe worth $250m or more have been pulled, according to Dealogic, almost a quarter of the total. Typically, a more modest 20 per cent are withdrawn — a costly decision after months of accounting and legal work, and a blow to the banks seeking juicy fees from initial public offerings.
On Tuesday, Eurotorg’s IPO became the latest to collapse. The Belarusian supermarket chain had planned to raise $200m in a London listing, but it shied away at a late stage, citing unfavourable market conditions.
Bankers acknowledge they have been spoiled by supportive markets for six years — an unusually long stretch. “We’ve had a good run,” as one put it. Some deals are still getting done. But with Brexit looming, investors tapping the brakes, and a flurry of high-profile deals leaving unpleasant memories, business is tough and unlikely to pick up soon.
“October and November are always difficult months. Investors are often cautious at this time of year,” said Nick Fowler, a managing director in European equity capital markets at Lazard in London. “But we have also seen more price sensitivity, particularly in the UK long-only [investor] community, and more deals getting pulled or pricing towards the bottom of the range.”
An almost €4bn deal for German technology and braking company Knorr-Bremse hit the Frankfurt Stock Exchange in early October to meet strong demand, and shares have gained 4 per cent since.
But that has been the exception rather than the rule in recent weeks, particularly since two banner IPOs fell flat in the UK. Lending group Funding Circle listed in London at the end of September, and shares tumbled as soon as shorting was permitted three days later. The share price now stands 11 per cent below the offer price. Luxury carmaker Aston Martin also listed in the UK the following week. Its shares immediately skidded lower, losing some 5 per cent on their first day — one of the weakest debuts of the year — and they now stand 13 per cent below the list price. About half of large IPOs in Europe this year are now below their offer price.
“The fund managers are saying ‘look at my IPOs from the last 18 months — they’re shocking’,” one equities banker said. That deters them from further potentially risky bets. In addition, October was the worst month for hedge funds in seven years.
Both Aston Martin and Funding Circle were hit by what bankers and investors describe as a “Marmite effect”, drawing enthusiastic doubters of their business models as well as backers. Still, they reflect structural and macroeconomic shifts that are nibbling at new issues, and they were followed by deal cancellations in Europe from Spanish energy company Cepsa, Portuguese retailer Sonae and Dutch car leasing group LeasePlan among others. In the UK, investment platform AJ Bell said it was still planning to list later this year.
Some bankers also think the new process for UK IPOs, first used for Funding Circle, is slightly pinching the flow of deals. The procedure brought in by regulators means that companies draw the typical four-week process — from announcing an intention to list to the final day of hitting the market — out to five weeks, with richer information available to potential investors earlier and extra scrutiny by so-called “unconnected” analysts who are not at banks involved in the deals.
While the extra time for the process is short, it can hurt, given that global markets, which have taken several lurches lower since early October, are even trickier to anticipate five weeks in advance. US interest rate rises, trade wars and the potential for a deeper Italian spat with the EU, as well as cracks in the technology sector, are all risks to markets that have pulled down global stocks.
Other structural factors also appear to be hurting new deals. With passive investment usurping the role of active fund managers, the potential target market for IPOs has shrunk. Hedge funds have increasingly stepped in to fill the gap over the past two years, but with broad market conditions having soured since early October, appetite there is also limited. Hedge funds’ net exposure to European equities now stands at a six-year low, Morgan Stanley calculates.
Now, bankers say that while some brave companies may take the plunge, many are waiting until potentially as late as the second quarter of next year to launch big deals, hoping to sit out uncertainty surrounding the UK’s scheduled exit from the EU in March.