London's equity markets have suffered their share of false dawns in the past few months. Companies have cancelled floats at the 11th hour and those that did not had some cause to regret it. That may all have changed yesterday.
There was a sigh of relief yesterday as two companies, SuperGroup and Promethean World, successfully priced their initial public offerings, but many still question whether it paves the way for several household names, such as Ocado, which are waiting in the wings.
John Hammond, capital markets partner at Deloitte, said the floats confirmed "the talk of the capital markets being open," adding that it "opens up the prospect of further IPOs in the immediate pipeline". Yet a banker who worked on one of the deals cautioned: "The money is there for the right assets, but it isn't a walk in the park. The mood is still febrile."
The classroom technology group Promethean makes interactive whiteboards that are found in over 70 per cent of UK schools, and the company believes it can take the technology worldwide. Laurence Hollingworth, who led Promethean's issue in his role as head of capital markets at JP Morgan Cazenove, said: "Investors were excited because it's a growth story. It's not leveraged and there is cash on the balance sheet." The group priced at its mid-point of 200p per share, setting the market cap at £400m. According to Promethean insiders, the interest in the float was so high that it saw 150 investors in just nine days of its roadshow.
SuperGroup, founder of the Superdry label, priced its shares at 500p each. What was a market stall in Cheltenham 20 years ago is now worth £395m. Both firms will be big enough to join the FTSE 250 at the next index reshuffle. "This demonstrates you can IPO businesses. Investors have become selective. There is a lot of cash out there but they don't want difficult businesses, me-too businesses or ones that are significantly overleveraged," Mr Hollingworth said, adding: "The market isn't yet open for large highly leveraged companies." Five other companies have announced intentions to float, according to Dealogic. These include the Russian coal group Suek, Metric Property Investments and CPP Group.
Thierry Monjauze, head of Europe for Harris Williams, a middle market M&A adviser, said: "Even in a market where IPOs are regularly getting pulled and the market window appears to be narrowing, companies that are market leaders with demonstrated revenue growth and strong cashflow generation characteristics should perform well in the after-market and attract strong institutional demand. However, average companies will find it more challenging."
The largest is the float of African Barrick Gold, spinning it out of Barrick Gold. It is set to be the biggest listing on the London Stock Exchange since New World Resources raised £2.5bn in May 2008.
Edmund Shing, equity strategist at Barclays Capital, said: "African Barrack Gold is attractive. There are obvious industry growth drivers for at least the next two years, and of course, it helps to have such a strong backer, and that the offer is at such a discount to what's out there already." He added that in the wider market "investors are still nervous and therefore much more focused on a company's individual merits".
Primary activity on London's equity markets plunged last year as the recession bit, down from 99 in 2008 to just 25, according to PricewaterhouseCoopers research. Tracey Pierce, head of equity primary markets at the London Stock Exchange, said there was "little certainty regarding the timing of future IPOs".
Even Gartmore, part of the City's asset management aristocracy, suffered a disastrous first few months as a public company. The group came to market in December, the largest of the year, after cutting its offer price by a third. It was hit after the crisis in Dubai rocked investor confidence. Gartmore is now trading at a further 5 per cent discount to its listing price.
At least the company still managed to get its float away. Others have not been quite so lucky. The private equity group Blackstone had to shelve plans to bring two of its companies to market. It first cancelled the £1.2bn float of the airline ticketing company Travelport after it struggled to interest investors, even after cutting the offer price. One investment banking source said: "I wouldn't want to be selling the Travelport IPO, the book was nowhere." Just 24 hours later, Blackstone walked away from listing its Merlin Entertainments business, which owns Legoland and the London Eye.
Just days later New Look pulled its float, blaming uncertainty in the markets, the second time in three years it has been forced to drop a potential IPO. As a mature UK business investors were uncertain over piling in.
Yet this has not dimmed the enthusiasm of the online food retailer Ocado, which is expected to announce intentions to float. John Lewis, which owns 28 per cent of the company, has given the go-ahead and it is close to appointing advisers. While management has not officially committed to the IPO, it is understood that is the preferred route. Yet the group has never made a pre-tax profit, and one banker said that could be a problem for the IPO. "Ocado will struggle over its profit history. For many potential investors that will be crucial."
Another household name, Betfair, has appointed advisers and is widely expected to be planning to list in London. Equity bankers yesterday predicted that the issue for the betting company, which could value it at £1.5bn, would be well supported by the City. Others rumoured to be coming to market this year include the computer game company Codemasters and the IT services group 2e2.
Philip Isherwood, head of equity strategy at Evolution Securities, said: "Of course, deals have to be structured properly, but conditions should be getting easier for those wanting to list. We are emerging from the bottom of the economic cycle, and as corporate earnings improve, so risk appetite will return and the environment for equity will get better. Towards the end of the summer and the autumn, we should be seeing more activity in the IPO market."Reuse content