EAGER businesses have flocked to the stock market for ambitious public listings this year to ride the new wave of investor confidence as Britain’s economic recovery has taken hold.
But events last week showed that the stirrings of an investor backlash may be underway. It has taken the shine off a surge in initial public offerings (IPOs) in 2014, with about 30 companies raising £4.4 billion so far.
That is up a whopping 163 per cent on the same period of 2013, and the feelgood factor at first seemed alive and well last week as another flurry of companies unveiled their plans to take the stock market shilling. B&M, the discount retailer, property website Zoopla, Wizz Air, the European budget airline, and boutique fund manager River and Mercantile all outlined their IPO plans on Thursday, with a combined potential value of £4.5bn.
Just 24 hours later EasyJet founder Sir Stelios Haji-Ioannou announced plans to raise up to £60 million by floating his discount hotel chain, EasyHotel, on the smaller Alternative Investments Market. There have been 16 flotation announcements in May alone. Meanwhile, Lloyds Banking Group is set to fire the starting gun this week on its plan to float 25 per cent of its TSB Bank subsidiary.
But a lengthening shadow is now looming over the flotation party. Investment bankers and brokers now believe the IPO boom has peaked as investor appetite wanes for what many think have been over-priced listings. And there are signs to support those fears.
Fashion chain Fat Face, owned by private equity firm Bridgepoint and where former Marks & Spencer boss Sir Stuart Rose is chairman, shocked the market by pulling its planned London listing last Thursday, citing equity market conditions. And bankers working on the listing of Saga, the holidays-to-insurance company, have revealed they will price the offer at 185p a share – the bottom of its 185p to 245p range. It means Saga will be valued at a less-than-expected £2.1bn and its owners will raise less than £300m as they sell down their stakes.
It is understood the lower price range came about after institutional investors told the IPO bookrunners assessing demand for the shares that valuing the equity originally at 18 times prospective earnings made Saga shares too rich for their blood.
“It’s clear some of the air has come out of the flotations tyre,” says Richard Hunter, market strategist at Hargreaves Lansdown Stockbrokers. “That’s not just because of Fat Face, which was a relative tiddler of an IPO at about £100m. But some of the pricing of IPOs has been too aggressive and it has backfired.
“In that changing climate, it is not surprising that companies might go for more conservative pricing, like Saga, or decide to shelve the plans, like Fat Face.”
In addition, a number of recently floated companies, such as Just Eat, Pets at Home, Card Factory, Poundland and Appliances Online, are trading below or roughly at their IPO price. That is not good for background sentiment in launching yet more businesses on to the stock market.
It is typified by retailer Card Factory, which floated at 225p. Its closing price on Friday night was 200p.
Michael Hewson, equities guru at CMC Markets, agrees that the best might be over. “I don’t think it is premature to call the top [of the IPO market]. Once the flurry is over, people tend to become more circumspect,” he said.
“Some of the valuations were simply too high. And I suspect that was because the IPO market had been flat for some time before 2014 and so the pendulum went too far and irrational exuberance on the part of bankers and investors set in.
“The pendulum has to come back. There is still room for more IPOs that are reasonably priced, but people are looking for value again.”
It is said this change in investor appetite has led private equity giant Apax Partners to lean towards a straightforward sale of Travelex, the UK foreign exchange business, instead of its planned £1bn public listing. Apax is reported to be in talks with a major Middle Eastern investor about a bid.
You can see the attraction of businesses going the trade sale route instead if investor cynicism hardens. Trade buyers may be able to cough up more for acquisitions than a float would raise because of the cost and revenue synergies they can shake out of the acquired business. And companies do not have to pay all those fat advisor fees attached to IPOs, either.
Perceived greed on the part of private equity owners is not the only factor slowing the float bandwagon, however. The FTSE 100 is up just 1 per cent in 2014. That compares with a 14 per cent rise last year when investors ploughed in to anticipate economic recovery feeding through to earnings and dividends.
One fund manager commented: “Sentiment towards shares has eased slightly due to macro factors. And that can also feed through to appetite for new share issues.
“We have had a stuttering US economic recovery, with mixed messages from the Federal Reserve on monetary stimulus. There is concern about a bubble developing in the UK housing market, a potential slowdown in China, and the Eurozone’s problems have not bottomed yet.” There is also the continuing volatility surrounding Ukraine’s future and Russia’s standoff with the West on the issue.
Even so, not everyone is calling the top of the float market. The optimists say there is still a lot of investor cash sloshing around that is not earning good interest after several years of historically low base rates. They say there is still appetite if a business has a sound, proven model and the IPO is priced realistically.
“Once you are reassured that a public listing is ‘priced to go’, it really all comes down to the business and its prospects itself,” one analyst said. “Both B&M in the discount retailing market and Wizz Air are good sound operations. And similarly, Saga is a growth story given the demographics of a lot more people being alive in 20 years time than there are now.
“It’s not for investors wanting a quick buck, but in for the long term. By contrast, Game Group for instance, nothing has really changed in terms of its business prospects since two years ago when it went into administration. The same forces are against it.”
Even though the retail sector has been heavily present in the wave of floats this year, investors also have to be persuaded that mooted listings have the resilience to cope with the strong headwinds on the high street.
That is particularly so given the raft of failures in the sector in recent years. These have included HMV, JJB Sports, Blockbuster UK, La Senza, Barratts Shoes, Tie Rack, Comet, Jessops and many others. The major supermarkets talk about the worst trading environment in a generation, while Carpetright founder and chairman Lord Harris of Peckham, who is stepping down in September, says he does not expect the market to recover until 2016. John Stevenson, retail analyst at broker Peel Hunt, commented: “I don’t think we have hit the top [of the IPO market] yet. But the power has swung back to the investor on pricing.
“Companies have to be more pragmatic. Fat Face was good in the UK, for instance, but still had a long way to go. It had no proven international model, on the likes of SuperDry or Ted Baker, for instance. Yet, by all accounts, the valuations being touted around it were pretty punchy. Too many recent floats have been priced too aggressively.”
Clearly, however, the latest IPO plans announced last week show that not everyone feels the party is over. Sources close to B&M, which sells everything from barbecues to trampolines, believe a public listing could value the group at between £2.5bn and £3bn.
Chief executive Simon Arora said: “The reception we’re getting is extremely encouraging. We believe investors are attracted to the scarcity value [of discount retailers]. To put it bluntly, you can’t buy shares in Aldi or Lidl [the two foreign-owned supermarket discounters who are eating chunks of market share out of the UK’s big indigenous players].”
And Wizz Air, in saying it wanted to raise ¤200m (£162m) of new money via a share offer, made no bones about the fact that it partly wanted the cash to fund acquisitions in what it said was a consolidating air sector.
In other words, the company was confident enough to ask investors to buy into its ability to handle forthcoming change via sector consolidation, not just recognise its past performance. Very 1980s.
The window has not closed for listings. But bankers say privately that institutional investors are becoming more picky about what they will back. Previous flotation booms suggest that means good news for the biggest and fastest-growing businesses that want to come to the market, but not so good news for small and medium-sized companies (such as Fat Face).