Almost exactly a year ago, Jack Ma was setting out on an investor roadshow for the world’s largest initial public offering: the New York listing of shares in Alibaba, which raised $25 billion for his Chinese eCommerce group. Within hours, the share price had risen by 38 per cent to $92.70, valuing the business at more than $230 billion.
However, on August 25, the biggest IPO story of recent times came full circle. Another day of turmoil on China’s equity markets pushed Alibaba’s shares below their listing price of $68 for the first time — and looks set to cause repricings or delays for companies coming to the market this September. “Most leading banks have 10 to 15 IPOs each in the September to October timeline,” says one London-based banker.
Several offerings are predicted to be worth more than $1 billion.
One of the most closely watched of these will be the IPO of shares in Worldpay, a payments company owned by the private equity groups Advent and Bain Capital. Worldpay’s owners are seeking a listing that would value the company at as much as 6 billion pounds — large enough to put it straight into the FTSE 100 index.
Both potential sellers and investors are now asking whether the sharp falls will damage investor sentiment towards these sorts of share sales. During the multi-year bull market for equities, private equity owners have been relentless sellers of portfolio companies via stock market listings.
Having used debt, or leverage, to buy out companies, these owners found that selling shares to equity investors provided a more lucrative exit than a trade sale to strategic buyers.
This dynamic looks set to change. “There are leveraged buyouts that need to come out — investors will take their pound of flesh from those companies,” warns Kathleen Smith, principal of Renaissance Capital, a manager of IPO-focused ETFs. “It’s going to be a buyers market.”
“And then others who can wait, may be wise to wait,” she adds — noting that when the Vix index of equity market volatility is high, IPOs are even harder to pull off.
Typically bankers are reluctant to place IPOs when the Vix is above 20, on August 24 it hit 40.74 — its highest level since August 2011 during the depths of the Eurozone crisis. “It’s going to be a tougher time for the IPO market, because there’s been a reset in the secondary market,” says Mark Hargreaves, a senior portfolio manager at Royal London Asset Management. “As an investor in the market we’re going to adjust our price expectations accordingly.”
In Europe, the September IPO of Worldpay will be joined by the expected privatisation of Poste Italiane, and Deezer, a French rival to music-streaming site Spotify. Bankers say that the turbulence might lead to some European IPOs that had been softly announced being quietly dropped.
However, two of the bigger transactions mooted for later this year — German chemicals company Bayer’s flotation of its material science division, and the IPO of Hapag-Lloyd — were still likely to go ahead.
“In any normal, rational market, you wouldn’t even consider going ahead with an IPO at the moment, if only because of the volatility,” says one senior Asia-based investment banker. “Valuations have come down dramatically.”
Hapag-Lloyd declined to comment. Bayer reiterated that it planned to float its material science business before mid 2016.
One big investor says: “Of course the volatility will force companies to reassess whether the price they can get is worth it. If it continues, it will likely ruin some IPO plans, as well as some deals in the M&A space.”
While markets in Europe have recovered, China fell further suggesting its troubles remain and the IPO market will be the hardest hit. A handful of large deals are currently due to launch in Hong Kong over September, with China Huarong, a so-called bad bank created to house troubled assets, investment bank CICC, and China Reinsurance topping the bill.
While none of these companies has so far signalled any intention to change their plans, the sell-off in Chinese assets is likely to put pressure on pricing if deals do go ahead.
Mainland banking regulators bar financials from selling new shares at a price to book valuation below one, meaning that deals will either need to be postponed or sold to investors at a premium to the market unless stocks rebound.
Christopher Betts, partner at Skadden, Arps, Slate, Meagher & Flom in Hong Kong, notes that continued volatility will probably result in deal delays, and will certainly push pricing down.
“It’s not so disastrous that people think the world is going to end. They hope it’s just a bit of interim turbulence,” says Betts. “People are still kicking off deals.”
Bloomberg data indicate that there are more than $10 billion worth of IPOs pending globally that have been announced just in the past three months, including Shred-It, a Canadian “document destruction” company aiming to raise about C$600 million; and Surgery Partners, a Nashville, Tennessee-based surgery centre operator that is targeting over $400 million.
Some IPOs have already been blown off-course by stock market turbulence. Manulife, Canada’s biggest life insurer, in July shelved plans to list a so-called “real estate investment trust” in Singapore. More recently RainDance Technologies, a US biotech company, said it would put its IPO plan on ice.
The recent turmoil could endanger other US listings in the pipeline. such as Petco, a private equity-owned pet care company; grocery chain Albertson; Neiman Marcus, a luxury department store; and SoulCycle, a boutique fitness company known for its celebrity fans and cultish following.
The market for private funding where hot tech companies have raised billions of dollars at high valuations, could be particularly vulnerable. “The days of massive private rounds and big valuations far away from reality are numbered. By definition you can’t be invested in private companies ascribing valuations far in excess of what public markets would ascribe,” says one IPO banker at a large bank.
“This correction was going to happen at some point. From a new issue perspective it is great for it to happen now really” says one US-based banker.
“In earnest, we won’t see deals until post Labor Day (September 7), so we have some time to let the market recalibrate and then decisions can be made — go or no go.”
— Financial Times
