NatWest share offer and Boots spin-out could provide timely boost to UK's flagging flotation activity

Analysts say prospects for the year ahead appear to be on the up in terms of flotation pipeline.

The past year was hardly a vintage one for stock market flotations, certainly not in the UK, but there are hopes that 2024 could herald a flurry of initial public offerings (IPOs).

As inflation comes off the boil, following the autumn 2022 peak of more than 11 per cent, and borrowers eye interest rate cuts as early as this spring, the risk averse sentiment surrounding new listings is likely to subside. Analysts at Hargreaves Lansdown, the investment platform, point to early indications that suggest the London Stock Exchange (LSE) might begin attracting some larger floats, amid worries about rival global indices.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said 2023 had been a “challenging” 12 months on the IPO front, amid market turbulence and risk averse investor sentiment. “Worrying levels of inflation saw central banks turn on the screws, raising interest rates dramatically and increasing borrowing costs, dulling appetite for growth stocks which saw a number of big IPOs shelved,” she noted. “Listings when they came, didn’t land elegantly, with Instacart and Arm losing ground after listing in New York. In London, there has been a veritable drought of new listings, and negative sentiment was compounded by the CAB Payments debacle. It was one of London’s biggest IPOs of the year, but it ended up a turkey after the company filed a profit warning soon after listing. We Soda’s scrapping of its plans to list in London was also a sharp disappointment.”

A share offer in Royal Bank of Scotland parent NatWest Group could be on the cards in the coming months.

She said the prospects for the year ahead appear to be on the up in terms of the pipeline for IPOs. Walgreens Boots Alliance is thought to be eyeing up the LSE when it hives off and floats the Boots the chemist business. Chinese fast fashion heavyweight Shein and buy now pay later provider Klarna are also said to be mulling a potential London listing.

“If these names do come through it will come as a relief as, even in the last few weeks of 2023, London faced fresh disappointment,” Streeter added. “The LSE has also been grappling with falling trading volumes, but hopes are being revived that the IPO market may start to bounce back in 2024 as investors’ nerve returns.”

A share offer in Royal Bank of Scotland parent NatWest Group could be on the cards soon, after the Chancellor Jeremy Hunt said he was mulling the move in his Autumn Statement. While not an actual IPO, the UK government is investigating selling its remaining chunk of about 38 per cent of the bailed-out banking giant. Part of this plan could well be a potential share sale to retail investors in the coming months.

Streeter said: “The plans would spell an end to the government’s intervention in rescuing the bank during the 2008 financial crisis. However, the government will be mindful of market conditions and getting value for money for taxpayers, although that could prove subjective.

Walgreens Boots Alliance is rumoured to be eyeing up the LSE when it hives off and floats the Boots the chemist business.

“Between 2008 and 2009, it cost the government £45.5 billion to bail out the then Royal Bank of Scotland. Previous reports suggest this was at an average 502p per share, much higher than the current price.

“The government hasn’t yet shared details of how a share sale would work. But it’s worth looking at a similar scheme which was planned, and later dropped, for Lloyds. Speculation at the time was that people would’ve had the option to apply for between £250 and £10,000 worth of shares. A discount of at least 5 per cent to the market price would’ve then applied. If held for a year or more, then a bonus of one extra share for every ten would be awarded, capped at £200 worth of bonus shares per applicant.

“What all this would’ve meant for existing shareholders was never specified. There’s a chance retail investors could have been able to sell their existing shares, then reinvest to get the bonus or discount. So, the government would have had to consider whether the share sale should run alongside another form of rights issue with a discount to reward holders. Something similar could be considered for the NatWest sale, but there’s no guarantee.”

Meanwhile, a number of big names are expected to come to the market in New York, including Databricks, Fanatics and Reddit. Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the last of those had been rumoured for a couple of years now. “The group makes its money selling advertising space, as well as premium ad-free subscriptions,” she noted. “These are like the business models of other social media companies, and when the going is good, it’s a capital light and profitable way of doing business.

“Last year, estimates had Reddit advertising revenue at $503 million (£400m) - a big increase on the year before. The landscape for advertising spending is closely linked to the economy though. If 2024 brings a recession, this could impact the valuation Reddit can get and increase the risks of ups and downs.”

On the prospects for Databricks, Lund-Yates added: “There’s a lot of excitement about a Databricks IPO. The cloud-based data storage and software giant was valued at $43bn in September and Nvidia was an early investor. The artificial intelligence (AI) boom would definitely be a tailwind and should offer a structural growth opportunity. Databricks itself isn’t ignoring the hype, having acquired generative AI company MosaicML for $1.3bn in June. The company is hoping it can integrate this tech into its own products.

“There’s a lot to like about Databricks. However, the attention around it means the final valuation might end up being too frothy to be attractive.”