This year’s form bodes well for 2020 primary raises; the two largest European deals of 2019 were capital raises carried out to fund M&A activity.
The largest European ECM transaction of 2019 was a £2.7bn block traded by AstraZeneca to part-fund a transformational oncology collaboration with Japanese pharmaceuticals company Daiichi Sankyo. The runner-up was a €2.5bn rights issue undertaken by Cellnex to fund the acquisition of the telecoms division of Arqiva. Both deals were wildly popular at the time of execution — Cellnex, for example, attracted almost €100bn of orders for a €2.5bn deal.
Banks are using the success of growth capital raises in 2019 to try to encourage other clients to take advantage of the market in 2020.
“Corporates are aware of the strong investor interest backing primary equity capital raises — not least given the multiple transactions we have done this year,” says James Manson-Bahr, head of EMEA equity syndicate at Morgan Stanley in London. “They are a very successful way to raise capital, and are fair for shareholders. Doing a rights issue or a wall-crossed block trade is an inclusive way of ensuring your existing shareholders get a look in alongside a broadening out to the market.”
The Cellnex transaction in particular was notable, because it came at a time when IPOs were struggling to attract enough demand to get deals across the line. Banks are aware that equity investors will likely continue to be far happier investing in established listed companies in 2020, rather than an unknown prospect through an IPO.
“One of the themes of 2019 has been that the bar to get an investor to buy something new is so much higher than the bar to get them to buy more of what they already own,” says Daniel Burton-Morgan, head of UK ECM at Bank of America in London. “The consequence is when companies raise money for sensible M&A and it is strategic, there has been very strong support for that, because investors have money to put to work, but they would rather do that in the comfort of a stock that they already know.”
Manson-Bahr agrees that investors are “instantly more engaged” when banks approach them about a primary growth capital raise as opposed to an IPO.
This is because in a primary capital raise, investors are often already shareholders in the stock with intimate knowledge of the management team and company. If there is an M&A angle to the capital raise the trades tend to be even more popular with the existing shareholder base.
“Investors typically have a view on related M&A targets — while they might not know the specifics, they will have already done some work and articulated internally their views around that target,” Manson-Bahr adds.
More M&A will drive more companies to raise equity capital and much of this activity could come from the UK.
The surprise agreement reached between the UK government and the European Union in October 2019 over the terms of the UK’s exit from the EU, led to renewed optimism for the country’s capital markets.
There is hope that an orderly Brexit will lead to an increase in investment from UK companies, where capital spend has been minimal recently, particularly in the form of M&A.
The UK held a general election on December 12, and there is a strong feeling among both investors and bankers that the result of the poll will likely lead to a resolution over the UK’s exit from the European Union in 2020.
A Conversative Party majority result should lead to more M&A, but as companies such as Cellnex and AstraZeneca proved in 2019, investors are happy to back solid corporate stories, even if the world looks less than favourable.
“A good Brexit outcome could incrementally help generate more M&A,” says Mansion-Bahr. “However, I think there is no question that if you have a great management team, one that cares about the asset they want to buy and, crucially, that asset is accretive and high quality, good business can get done regardless of Brexit.” GC