Appearances can be deceiving. This is certainly the case with Europe’s IPO market which, despite signs of robustness, remains highly sensitive. One bad deal could send the whole house crashing down.

IPO bankers and sellers are attempting to mitigate as much risk as they can through what they hope are compelling valuations, as is the case with Europe’s two marquee deals Galderma and Douglas.

Both transactions are being run on an accelerated timetable with just one week of pre-deal education and one week of bookbuild, compared to the traditional two-and-two approach. Sellers hope that the valuations on offer are attractive enough to encourage quantitative and qualitative investor participation.

Douglas, backed by CVC, will have a market cap of EUR 2.8bn to EUR 3.1bn. The company expects to have around EUR 2bn of post-money debt, once proceeds are injected into the cap structure, said a source close to the deal. This translates to an enterprise value of EUR 4.8bn to EUR 5.1bn, around the levels investors told ECM Pulse they would be willing to buy into.

“People were very interested in the IPO at between 6.5x and 7x 2024 EBITDA, the range we came out with is about 6.1 to 6.4x,” the source added.

Galderma also looks reasonably compelling when looking at the numbers. The EQT-backed Swiss skincare group will have a market cap of CHF 11.8bn to CHF 12.6bn, given its price range, which translates to around USD 13.4bn to USD 14.3bn.

EQT [STO:EQT] reportedly was seeking an enterprise value of around USD 20bn for Galderma at IPO, but a source said given that the company is expected to have EUR 2.9bn of post-IPO debt, it will have a post-money enterprise value of USD 16.4bn to USD 17.3bn.

Before Galderma was launched this column modelled a possible EV of USD 21.1bn based off peers Alcon [SWX/NYSE:ALC] and L’Oréal [EPR:OR]. “This is coming far cheaper than what was reported before and is a big discount to all of its listed peers,” said the Galderma source.

Markets fragile

All sources speaking to ECM Pulse last week noted that despite talk of European IPO resurgence, their main takeaway from marketing is that sentiment remains fragile.

The source close to Galderma and a second source close to Douglas said that people only need to cast their minds back a few months to the autumn, a time when the IPO market was beset by cancelled transactions and volatility to remember sentiment can change quickly.

Chart note: IPO Health Index EMEA

ION Analytics’ proprietary IPO health index* shows a marked improvement in IPO market conditions from the depths of last Autumn, but still at a level where caution over pricing is likely warranted.

Several sources noted that both EQT and CVC should be incentivised for the IPOs to trade up. Both deals are almost entirely primary raises with the proceeds being used to strengthen the balance sheets of both companies, leaving both with significant stakes left to sell.

Quality over quantity

The second source close to Douglas said that the key to success for both deals will likely be the number of high-quality institutional investors that they can get into the book.

While Douglas was covered in three hours, it was not covered “throughout the range” for another couple of days, perhaps indicating price tension in the book.

“Douglas clearly have the demand, but I am not sure about the quality,” said an ECM investor. “It isn’t expensive but it’s not cheap either and the question is whether it’s cheap enough for people to continue to buy it in the aftermarket.”

The investor added that he hoped the book was not being driven too heavily by local demand as that might lead to overallocation to more marginal IPO investors.

“IONOS [ETR:ION]  and Lottomatica [BIT:LTMC] were both covered fast as well but traded down straight afterwards,” said the investor. “For this kind of deal, you need at least EUR 2bn of really good demand, so it will be interesting to see if it has that.”

The second source close to Douglas noted that an initial fast covered message was a strong start but that the quality of the book would determine the success of the IPO. “Obviously we won’t know all the investor details until the end, but I can tell you we feel super positive.”

On Galderma, the investor noted that, while the stock wasn’t screamingly cheap, it reflected the feedback EQT had been given. “Galderma is a much bigger asset with a very different profile, it isn’t overly cheap but there is an easier case to buy superior growth and a large cap profile, it will also tap into Swiss demand, very different to local German accounts,” said the investor.

The Galderma source also talked up the number of long-onlies in the book, adding that demand would likely be high enough not to overly concentrate the book to a tight number of large long-onlies but allow smaller institutional investors a greater allocation.

This was the case with a GBP 1.4bn block in the London Stock Exchange Group two weeks ago, which, at the time, was cited as evidence of growing investor demand for ECM exposure.

There is a wide perception in the market that both CVC and EQT want their IPOs to be successful, not least because CVC is expected to be working on its own listing in a mega deal after Easter. The question though is whether the discounts are enough for both to pop when they price this week.

“The motto here is don’t mess it up,” said an ECM banker.

EQT and CVC declined to comment.