Market volatility is showing no signs of letting up. The Euro Stoxx 50 was, by close on Thursday, down 8.8% so far this year. On Thursday alone, the index was down 2.1%.
Volotea was the year's first victim. On Tuesday, the Spanish low cost airline said it was postponing its IPO, which would have raised €65m of primary proceeds, blaming market volatility for the decision.
“It felt like the wrong market to do it in,” said one disappointed lead banker. “It was the wrong market to get the kind of value it deserves.”
And on Thursday, the UK’s chancellor of the exchequer, George Osborne dashed hopes of an early 2016 sale of Royal Bank of Scotland shares (see separate story). He said global stocks were in too much turmoil to launch the deal.
Two days earlier, The Guardian reported that Brakes Group, the UK food distributor, had for the same reason postponed its flotation, which could have valued it at £2.5bn.
Bankers say managing sellers’ valuation expectations is key. For deals to be done, they must be cheaper.
“Investors are telling us they’re open for business, that they came into the year relatively underinvested,” said Craig Coben, co-head of global ECM at Bank of America Merrill Lynch. “They are looking for value in the new issue market because they see a lot of attractively valued stocks in the secondary market: new issues have to offer compelling value for them to participate.
“The market is open but there is more price sensitivity than there has been in the past.”
That is quite the understatement.
As one ECM banker at a large European bank that has yet to launch a deal this year said: “Everything is being done at a very steep discount compared to peers.”
His assessment applied to three London IPOs in the market — for Ascential, CMC Markets and CYBG — as well as to the Copenhagen listing of Scandinavian Tobacco.
The cigar and pipe tobacco manufacturer set the price range of its IPO on Thursday at a level that one of its lead bankers said represented a “very considerable discount” to comparables.
“The range is very attractive,” the banker said. “In these tricky markets, Swedish Match [a large shareholder in the firm] wants to make sure it goes well.”
He added that it represented a “very considerable discount” to Scandinavian Tobacco’s comps, the large cap global tobacco makers such as Imperial Tobacco and British American Tobacco. These businesses are much bigger than Scandinavian Tobacco, however.
Comparable firms offer dividend yields of 4%-4.5%, while Scandinavian Tobacco’s offer would be closer to 6%, the banker said. The others’ free cash flow yield, meanwhile, is about 5.5%, while Scandinavian Tobacco’s would be in the double digits, he added.
The business is being valued at between Dkr9.3bn ($1.4bn) and Dkr11bn ($1.6bn), based on the offer range of Dkr93-Dkr110 a share.
Also on Thursday, information and events business Ascential set a price range of 190p-220p, which implies a market capitalisation on admission of £760m-£880m. A banker had previously told GlobalCapital that the firm could achieve a valuation of £1bn.
UK mid-sized bank Clydesdale and Yorkshire Bank Group, meanwhile, is being offered at 175p-235p a share, or 0.56-0.76 times book value. That is well below its peer group of medium-sized UK banks, which trade on average at above one times book, according to a banker on CYBG’s initial public offering.
Finally, CMC Markets, the financial spread betting firm, set on Tuesday the price range of its London IPO at a level that will value it at up to £794m. At the low end of the range, its market cap would be just £678m.
The obvious comparable to CMC is IG Group, which floated in 2005 and trades at an enterprise value/Ebitda multiple of 15.
Based on the most recent six month period, CMC’s annualised Ebitda is £60m, suggesting the enterprise value should be closer to £900m, if it could achieve the same multiple as IG Group.
FONGO trumps FOMO
Very few sellers have dared come to market so far this year. According to Dealogic, the first 27 days of the year in Europe have produced the lowest ECM activity, by number of deals issued, for that period since 1995.
Just 24 deals have been done so far in 2016.
Volume, meanwhile, is the lowest for January since 2009, in the immediate aftermath of the financial crisis.
Bankers said only the biggest, most liquid and most opportunistic issuers should come to market, for only they can attract investor demand.
“Clients are going to need to explore not just market windows but also market wormholes, because the opportunities now present themselves so briefly," said Coben at BAML. "It’s a market that will favour opportunism.”
And he added, on size: “FONGO, the fear of not getting out, trumps FOMO, the fear of missing out. Size and liquidity are very important. Generally speaking, we’ll have to work a lot harder to complete smaller IPOs.”
Nothing concerns investors more in the current market than being stuck in a stock, with no prospect of exiting if it collapses in trading.
Bankers on and away from Volotea’s pulled IPO suggested that the prospect of illiquidity might be one of the reasons why it was cancelled before it even reached the bookbuilding stage, when other issuers have set price ranges and started taking orders.
A banker on the deal said: “On the plus side, it’s a space investors were engaged in. It’s a space with good traction. Long and sector guys were interested.
“On the other hand,” he continued, “it was very small. It’s an early stage, low cost carrier.”
Volotea was founded in 2012 by the creators of another Spanish low cost airline, Vueling. A banker away from the deal said Volotea was at such an early stage of its development that he had never even heard of it.
Asked whether the other IPOs still in the market would fare better, due to their size and deep discounts, the same banker said on Thursday: “It depends what the asset is and whether there is a rarity value to the name.”
But he added, warily: “The market is still very volatile. We were all over the place today. It’s been a very volatile session.”
Adolfo Lázaro, a spokesperson for Volotea at PR agency Estudio de Comunicación, said on Tuesday: “We will continue to seek a flotation, but will do so when there is not as much volatility as now.”
CYBG’s IPO, for one, is oversubscribed on the full deal size. The bank is due to start trading on Tuesday. As yet, the banks have revealed little about the other IPOs’ books.