IPO fall-off far more pronounced than market had expected

With the value of European IPOs in the first quarter down 80 per cent on last year, companies are suffering a lack of capital for acquisitions, writes David Labanyi.

The collapse of initial public offering (IPO) activity in the first quarter has been more severe than even the most pessimistic analysts had anticipated.

Tumbling equity prices and a credit crunch that is sucking up funds have conspired to send the value of IPOs on the European markets plunging to just €1.9 billion, down almost 80 per cent from the €10.6 billion raised in the first quarter in 2007, according to the latest PricewaterhouseCoopers (PwC) quarterly survey of the sector.

The impact can also be seen in the decline in the volume of deals which has halved to just 70 compared with the January to March period in 2007. Also apparent from the report is the falling equity market confidence over recent months as the number of IPOs was lower in March than January.

Denis O'Connor, partner with PwC Ireland, said IPO activity so far this year has been disappointing, reflecting the continued uncertainty in financial markets. "The market conditions are difficult for new IPOs with investors reluctant to move against a difficult equity market backdrop and this is causing companies which had been set to float to postpone their plans," he said.

As a consequence, money is staying in investors' accounts and pockets rather than going into IPOs, removing much of the capital required for acquisitions.

"The outlook for the next quarter is pretty bleak too as we do not expect many companies to attempt an IPO before the third quarter of this year at the earliest."

Recent moves such as the injection of €80 billion of liquidity into the market would help, says O'Connor, but there was a question mark around the impact of the move.

"You have to offset that against the RBS rights issue that will take a lot of money out of the equation."

How long companies can defer their IPOs depends on the industry and what they need the cash for, according to O'Connor.

"If they have to look at raising cash in the next six or nine months, some might decide to do a private placing where they won't have the costs associated with an IPO," he said. "A time will come when these investors will want to get their cash and the only way they can get it normally is through an IPO."

When this cycle will turn is impossible to gauge and O'Connor says the current lull "cannot go on forever because people have to do transactions. Deferral will probably only work for a year or two at most."

The first quarter is traditionally the quietest for IPO activity, as most companies wait until publishing their annual report before embarking on an offering.

With bank lending restricted and stock markets in the doldrums, the PwC report notes that three-quarters of IPO activity in the first quarter was from companies based outside Europe, particularly those from oil- and commodity-rich states.

"There has been a fair bit of investment from the oil rich areas over the last couple of months. A lot of Arab oil money has come into the UK banks and that is probably the main area of investment at the moment," says OConnor.

The largest IPO offering in the first quarter was the €600 million raised by investment company Liberty international on the NYSE Euronext. Even this is indicative of the contraction in IPO activity this quarter because, in the same quarter of 2007, the top three IPOs all raised over €1 billion.

According to the PwC report, average values for European IPOs this year have fallen to €34 million, almost one-third of the €91 million average a year earlier.

London led the European markets in terms of money raised, accounting for more than €1 billion.

Because all sectors are suffering in falling equity markets, the cooling IPO activity is affecting all sectors, according to O'Connor. "Agri-food is the only sector where equity values have increased."

The sector breakdown in the PwC report shows the goods and services sector accounted for the highest number of IPOs, followed by investment companies.

Reflecting ongoing problems with property markets, the financial companies and real estate sectors saw the most dramatic reductions in IPO activity this quarter.

There were four IPOs by financial services firms compared with 18 in 2007, and only two real estate firms floated compared to 10 in the first quarter of 2007.

This quarter saw no IPO on the Iseq and O'Connor says the big "Irish companies are all looking at options at the moment but they are slow to invest. They are probably looking at it more closely now than they would have done in previous years."

However, the difficulties with raising cash mean there are opportunities available for the cash-rich.

"The big Irish plcs such as CRH have done bolt-on acquisitions already this year and, for them, there is value to be got. They have their own internal resources and, as a result, they do not need to get it from the banks," said O'Connor.

This idea of exploiting the opportunities created by the financial crisis is one that was also referred to by Stephen Schwarzman, in an interview earlier this month in this newspaper.

The chairman of US private equity firm Blackstone has $100 billion (€62 billion) in assets under management and believes this point in the cycle offers opportunities, as has every US recession over the last 25 years.

"At this point in the financial cycle, typically financial institutions are trying to get rid of a lot of their assets - particularly bank loans and junk bonds - and they tend to sell them at clearing prices," he said.

After each of the recessions, there had been a feeling that the events had changed things permanently, he said.

"In fact, these are just cycles. The cycles come and the price of assets go down. There is much less debt and folks like ourselves find a way to buy those assets when they are cheaper."

The LSE, PricewaterhouseCoopers, William Fry and Brewin Dolphin will make a presentation to more than 100 leading company executives in Dublin's Westin Hotel tomorrow.