Is it too early to hail a return of the IPO?
Experts are divided about whether an upcoming raft of flotations means the stock market's IPO freeze is finally thawing
Wednesday 27 February 2013
Investors had seen enough. Years of underperforming stock market flotations had taken their toll, while at the same time investment banks continued to rake in extortionate fees. Royal Bank of Scotland's disposal of Direct Line last October seemed like the perfect time to act.
For London's initial public offering market to survive and beat off competition from overseas, something needed to change. Buoyed by the success of the shareholder spring, fund managers went on the warpath.
"Investors are jaundiced by the sheer number of stock-market listings that have been unsuccessful," one said at the time. "Nobody is prepared to invest in another over-priced company."
Another warned that Direct Line would need to be "squeaky clean and reasonable on price" in order to list. The stakes were high.
Fortunately for those involved, RBS's advisers were fully aware of the disappointment surrounding listings from companies such as Betfair, Ocado and even Glencore.
Direct Line's flotation was "priced to go" at 175p and the fees paid to banks were modest. Four months on, the group's share price is up by 20 per cent, and with markets at five-year highs, the appetite to list on the London Stock Exchange is back again.
Esure, the home and motor insurer best known for its adverts featuring the late Michael Winner, became the latest company to pursue this route, following in the wake of the housebuilder Crest Nicholson and estate agent Countrywide.
With others such as Partnership Assurance on the way, experts have hailed the return of the IPO. However, others warn that it may be too early to tell just whether advisers and shareholders have reached a common ground where they are both happy to work.
Esure's flotation is expected to value the company at about £1bn.
The founder, Peter Wood, who also founded Direct Line, said Esure hoped to raise about £50m from the flotation, which will be used to pay down debt and boost growth. The share sale could also see Mr Wood selling up to £200m of his stake, although he will remain the largest shareholder.
"Our record of outperformance is down to our granular understanding of risk, our conservative underwriting approach and our speed in reacting to change," he said. "I believe we are now in a strong position to combine these advantages in a new UK insurance-sector investment that combines genuine organic growth with potentially attractive returns."
Esure, which also owns half of the comparison site Go Compare and the Sheilas' Wheels insurance brand, has been one of the industry's strongest performers since being founded in 2000. It was part-owned by Lloyds Banking Group until 2010 when Mr Wood led a management buyout. It has continued to grow since then despite personal injury claims ravaging the motor insurance market, and now claims to have more than 1.5 million policyholders.
Esure is expected to float in the next few weeks. Its shares will be available to institutional and retail investors.
John Hammond, the head of Deloitte equities capital markets, believes the listing will be one of many in 2013. "There are a number of encouraging signs," he said. "The volatility index has been below the critical benchmark of 20 for most of the last eight months, and the FTSE 100 is close to five-year highs, which has made valuations more attractive to sellers.
"There are other signs of a calmer economic climate which should encourage more listings in 2013 – we've stepped back from a euro collapse, the UK is hopefully returning to economic growth, and credit markets across Europe are more stable. The fact that recent IPOs such as Crest Nicholson, Direct Line, NMC and Polymetal are all trading above their issue price has helped to dissipate some of the negative sentiment towards IPOs."
For investors, however, it is not just economic sentiment that is driving the market. Robert Talbut, the chief investment officer at Royal London Asset Management, believes investors and advisers made a key breakthrough in their relationship last year. However, Mr Talbut, who is also head of the Association of British Insurers' investment committee, warns that shareholders will not be willing to accept a return to the old ways.
"It's true to say that we have seen a better understanding between shareholders and investment bankers, who are making efforts to ensure there is an after-market for shares," he says. "Simply maximising the day-one price without any consideration for long-term investors is not acceptable.
"The improved market for IPOs remains dependent upon a continuation of sensible pricing and relatively healthy equity markets."
Barring an economic disaster, the next few months promise to be active for the UK IPO market.
On the market: Companies going public
The UK's largest estate agency is looking to return to the London stock market with plans to raise £200m. The group, behind Hamptons and Bairstows Eves, owned by the private equity firm Oaktree Capital, is behind one in 11 home sales.
Five years after being taken private by the Scottish entrepreneur Sir Tom Hunter, the housebuilder pulled off a £553m IPO earlier this month, the largest in London so far this year.
RBS was forced to float off a 30 per cent stake in its insurance arm Direct Line last October after its state bailout. Despite initial misgivings in the City, the shares have risen 20 per cent and the float is now seen by some as marking the revival of the IPO market in the UK.
The Russian mobile operator controlled by the Arsenal owner Alisher Usmanov raised just over £1bn last November, listing in London and Moscow. But the sale received a lukewarm welcome from investors, and quickly fell below the $20 (£13) a share offer price, which was itself at the bottom of the company's indicative $20-$25 range. However, the shares this year have risen above $27.
In the pipeline
Merlin Entertainment (owner of Madame Tussauds and the London Dungeon), Formula One and the retirement homes builder McCarthy & Stone are among firms understood to be looking at listings later this year.
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