Market collapse hits new issues

News Analysis: Flotations this quarter have been at their lowest level in over a decade
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The Independent Online
THE STOCK market may have enjoyed a welcome bounce yesterday but the gathering storm clouds over world financial markets are having a dramatic effect on UK flotations.

Figures produced earlier this week by KPMG, the chartered accountancy firm, paint a stark picture. The study shows that only 12 companies joined the market in the third quarter to September, compared with 30 between April and June. It was the quietest quarter in more than a decade.

But the slowdown is not just restricted to flotations. New figures produced by Acquisitions Monthly yesterday showed that merger and acquisition activity plunged in the third quarter from pounds 16.2bn in May-June to just pounds 10.3bn in the three months to September.

The slowdown in corporate activity can have severe knock-on effects. For the big banks, whose corporate finance departments rely on a steady stream of flotations for their bread-and-butter fee income, this kind of slump can decimate earnings and bonus levels.

For the venture capital firms, which have backed management buy-outs, it is likely to become increasingly difficult for them to exit their investments via the flotation route. A recent study by the Centre for Management Buy- Out Studies predicted an "exit pile-up" saying the stock market will not be able to accommodate all the companies that are seeking flotations.

A swift end to the woes seems unlikely. Robert Swannell, vice-chairman of J Henry Schroder, the investment bank, predicts that the sharp drop in activity will continue until the market settles down.

He says: "Activity was grinding to a halt in June and July and there will be a hiatus until the market has reached a level and you don't get these big swings. But there is nothing new in there being a period of turbulence where flotations are curtailed."

He says the crippling factor for new issues in turbulent markets is that it becomes impossible for buyers and sellers to form a view on valuations.

Lindsay Dibden, of Mercury Asset Management, was forced to abandon the flotation of Parc, the airline pilot recruitment company, due to the difficult stock market conditions.

"It is just impossible to get anything away," he says. "There is a value for everything, I suppose, but at the moment it is `poke in the eye' money. We may re-visit the float in May depending on market conditions."

Parc is one of a growing list of companies that has been forced to shelve its float plans in the past few months as stock markets have nose-dived.

Sports Division was one of the first to change its mind when it abandoned its pounds 350m flotation when the branded sportswear market ground to a halt in the spring. The group was later sold to rival JJB Sports for a lower price of pounds 290m but even that valuation now looks expensive.

Other examples have come thick and fast. Virgin Rail sold half of its equity to Stagecoach rather than seek a flotation. Tetley, the tea and coffee company, had been due to come to the market in July but delayed its plans amid rumours of interest from a trade buyer who has yet to materialise. Pinnacle Leisure, a health club operator, had been scheduled to come to the market this month but the float has now been pulled.

Others are pushing ahead regardless. Old Monk Company, an operator of managed pubs, is pressing on with its pounds 13m float but will raise less than the pounds 3m first hoped for.

MSW Technology is also going ahead later this month although talks with potential investors have not been easy. "Some people are pretty shell- shocked and the general mood is not to look at smaller companies," says Larry Maddy at Gilbert Elliott, broker to the issue. "You are more likely to get a positive response from specialists in certain sectors rather than general fund managers."

Many of the major new listings in recent months have been de-mergers from larger companies. Torotrak pressed ahead with its de-merger from British Technology Group. Hillsdown Holdings spun-off its Fairview Homes and Terranova Foods divisions this week despite market turmoil. Sears persevered with the de-merger of Selfridges department store business, but the jury is out on whether it will go ahead with the de-merger of its Freemans mail order business that is currently scheduled for later this year.

The major banks deny that a buyers' strike is bad for their income streams. They say that float fees are not as important as advisory work on mergers and acquisitions. On this basis banks such as Credit Suisse First Boston, BTAlex.Brown and Warburg Dillon Read are more likely to be affected than rivals such as Schroders, Morgan Stanley and Goldman Sachs, which top the recent Acquisitions Monthly list. But most say the impact will be minimal.

For venture capital funds the impact is likely to be one of timing and a slowing of expectations on investment returns.

Venture capital funds may find themselves locked into certain deals for longer than expected but experts say it will only become a problem if current market conditions prevail for another three to six months.

If the turmoil does persist, companies may have to seek trade buyers rather than a float although this is often less popular with the managements as it means they surrender control.

Neil Austin, of KPMG corporate finance, says the weak stock market could provide cash-rich venture capital funds with ample opportunities to buy quoted companies, as opportunities to raise additional capital through the market evaporate and smaller stocks become increasingly under-valued.

He predicts a lag of several months between the market stabilising and banks gearing up to float companies again. "It could be spring before the new issues market picks up."

Before then, Mr Austin says the total number of quoted companies could shrink, with the number going private or being taken over exceeding the number floating.