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Testing the waters -“ Europe’s IPO window re-opens

Europe’s IPO market is open again with the two most significant potential listings since the Russian invasion of Ukraine in February, but market turbulence and investor nerves mean sellers will have to take a cut on their valuation hopes to price a deal.

Last week saw the launch of two Italian listings, Eni’s [BIT:ENI] renewables division Plenitude and De Nora, an electrolysis and water technology company, which is a major player in the production of green hydrogen.

The deals follow one of the worst opening halves to the European market in a decade, with European IPO volumes of around USD 4.9bn in 1H so far, according to Dealogic. The total is only slightly better than the USD 4.2bn issued in the first half of 2012 when new issuance was paralysed by the European sovereign debt crisis and the possible defaults by countries such as Greece, Cyprus, and Portugal.  

Both Plenitude and De Nora play into the theme of green energy transition in Europe and a push for energy independence from Russia since the outbreak of the war. As such, they were perhaps the two most likely pre-summer IPOs, as the ECM Pulse predicted in May in a piece suggesting that green energy deals were among the only large European IPOs that could buck a difficult market to price new listings before summer.  

However, in a cruel twist of fate, the return of European IPOs has coincided with the return of wider equity market volatility. The US S&P 500 has fallen by over 6% since the start of last week, erasing most of a relief rally from the end of May, and the CBOE Vix index is back above 30. The Stoxx 600 has fallen by almost 7% over the same period.

A return of volatility may have transformed the challenging task of balancing seller price expectations with investor demands for a greater IPO discount, into a Sisyphean one.

“It’s Murphy’s law,” bemoaned a senior ECM banker. “As soon as you stick your head above the parapet the market turns.”

Valuation talk is already proving tricky.

Sources told this news service last week that De Nora was hoping for a valuation between EUR 4.5bn and EUR 5bn EV for its IPO; a market cap of roughly between EUR 4.3bn and EUR 4.8bn given the company’s EUR 200m of debt.  

However, three investors speaking to ECM Pulse said there is a substantial gulf between that valuation and where investors are willing to buy the stock.

Sources added that there is also a feeling that Eni will have to take a substantial discount for Plenitude and accept a price below the EUR 8bn to EUR 10bn that the company reportedly wants for the asset.  

“De Nora and Plenitude should do well, but they are going to have to come a fair bit cheaper than they were hoping to,” said the banker. “The reality is if you are going out in this sort of market you are going to have to be a price taker but if there is anyone willing to do that it’ll honestly do the whole market a huge favour.”

September: A new or false dawn?

Most of Europe’s high-profile listings scheduled for 2022 have now been postponed until the autumn IPO window in September, including the listings of the e-mobility unit of ABB [SWX:ABBN], Swiss skincare company Galderma, and Spanish storage company Mecalux, all originally slated for before Easter.

They head a busy autumn IPO pipeline that could include private equity firm CVC, Olam Food Ingredients, and Burger King UK.

Many of these companies had hoped to list earlier in the year but moved back in the hope that a better window would present itself later in the year and they could sell for a better price.

The fortunes of these companies, however, could depend on De Nora and Plenitude, and two ECM bankers said that a postponement of either or both deals could be a disaster for the September pipeline.

A strong second half can often compensate for a poor first six months. In 2020 for example, IPO issuance in the first half was at a paltry USD 6.26bn, according to Dealogic, but in 2H the market roared back with USD 22.3bn of deals, albeit fueled by central banks who have this year turned off the tap.  

One of the investors mused that he could not see any evidence that macroeconomic pressure on equity markets would improve by September, and that sellers would still have to be willing to sell at large discounts to get deals done.

He added that even if the conditions did, against all expectations, improve dramatically by September, the window would be so busy that any price advantage from waiting would be negated.

“I wish there was something more to it but the way to get deals done is for sellers to manage valuation expectations,” the investor said. “Lots of buyers, particularly long-onlies have been disappointed by recent IPO returns and can find better value in public markets.”  

A third senior ECM banker said IPO timelines were sliding rapidly with much of the perceived autumn pipe being more likely in 2023, a suggestion backed by another banker working on live deals.

But there is hope that if De Nora and Plenitude are successful, they will provide a model for other issuers and most importantly prove deals are possible.

“Everyone is watching the two Italian IPOs carefully and if they go well it [will] put pressure on issuers to make a decision to pull the trigger on a listing, either now, or in September,” said a fifth banker.

De Nora previously declined to comment on valuation discussions when approached by this news service last week. Eni declined to comment on Plenitude valuation discussions.