Agenda: Open season for IPOs puts Irish businesses in the shop window

Bailed-out AIB bank bounces from profitability to dividends as flurry of flotations loom

 

It was the test AIB probably wished it had failed.

Two and a half years ago, the bank comfortably passed a European banking stress test of lenders’ ability to withstand another sharp downturn. Permanent TSB failed – forcing the smaller of the two bailed-out banks to jump the natural queue, raise equity and rejoin the main Dublin and London stock markets.

Shares in Permanent TSB, which this week revealed a €266 million loss for last year to cement its position as the only surviving Irish bank to remain loss-making since the crisis, are languishing about 40 per cent below the share sale price. AIB, having bounced back to profitability in 2014, last week became the first bailed-out bank to unveil a dividend since 2008 as it posted net income of €1.36 billion.

Minister for Finance Michael Noonan confirmed subsequently he is preparing to sell a 25 per cent stake in AIB in an initial public offering (IPO) as early as May. It may raise over €3 billion for the State as it seeks to continue to recoup €21 billion pumped into the bank during the crisis, and deliver as much as €150 million in fees for banks underwriting the deal.

Being bumped off the IPO runway in 2015 may be about to pay off.

“Timing wise, AIB may have hit a sweet spot going to the market now,” said Owen Callan, an analyst with Investec in Dublin. “Had it gone a few years ago, it might only have been worth €7 billion to €8 billion, whereas now its correct market capitalisation could be between €12 billion and €13 billion.”

“AIB will be sold on a much more fundamental story of underlying strength. The rate at which its non-performing loans are falling – at 30 per cent last year alone – is the fastest in town by some distance.”

Over the past two years, the bank has been able to release €1.2 billion of provisions previously set aside to cover bad loans, as it restructures soured loans at pace and the economy improves.

Patience is also about to finally be rewarded for followers of another Irish company, the Ardagh Group.

Ardagh’s executive chairman Paul Coulson took the once-lowly Irish glass bottle maker private in 2003, a year after closing its original Ringsend plant in Dublin. He subsequently went on a massive international acquisitions spree, spending over €7.5 billion on deals, which would turn it into one of the world’s largest glass and metal container makers, with blue-chip customers ranging from Heineken to John West and L’Oréal.

Along the way, Coulson has tested the mettle of so-called junk-bond investors who backed his deal-making.

Loaded with some €7.2 billion of net borrowings, Ardagh this week launched plans to raise as much as $373 million (€352 million) through an IPO and New York Stock Exchange listing by the end of the month. It would value the group at up to $4.69 billion and Coulson’s own 36 per cent stake at $1.57 billion. More importantly, it would accelerate the group’s plans to lower its debt burden.

Coulson has been looking at bringing the group back to the market since 2011.

“The decision to pay down debt with the proceeds is a positive step towards demonstrating a less aggressive financial policy, which remains the key constraint to the [company’s credit] rating,” said Terence Smiyan, an analyst with Standard & Poor’s, which has a B rating on the group’s debt, five levels below what the agency considers “investment grade”.

“We continue to consider the prospects for higher ratings on Ardagh would stem from evidence of sustainably reduced leverage and a commitment to a more conservative financial policy.”

While the global IPO market floundered last year amid market volatility, Brexit and nervousness ahead of the US presidential election, the number of deals has picked up markedly this year. Some $114 billion worth of IPOs have been announced so far in 2017 – of which €82 billion have been priced, according to Bloomberg data. Almost a half of the value of announced deals are in the US, with a further 18 per cent in Europe.

Snap flotation

The flotation last week of Snap, parent of image messaging mobile app Snapchat, was the biggest US tech IPO since Chinese online retailer Alibaba listed in New York two years ago. Snap raised $3.4 billion from the sale of shares, valuing the company at almost $24 billion. While the company’s shares surged by 60 per cent in its first two days of trading, they fell back by 20 per cent earlier this week.

Feared before the US presidential election in November, Donald Trump’s brand of promised growth and inflationary policies has since fuelled a surge in global markets and sent US indices to record highs. The Dow Jones Industrial Average has gained 16 per cent since the vote, while the Nasdaq has added 13 per cent and the S&P 500 12 per cent. On this side of the Atlantic, European markets have advanced over 11 per cent – despite concerns of a rising tide of anti-establishment sentiment as the Netherlands, France and Germany face elections in the coming months.

Trumponomics “is part of the jigsaw, but also the fact that the actual economic data we have seen from the US and Europe of late has surprised on the upside”, said Eugene Kiernan, head of investment strategy at Appian Asset Management in Dublin. “The US central bank is suggesting the economy is robust enough to withstand rate hikes, and also, for the first time in a number of years, we have see analysts’ company profit forecasts for 2017 holding up, or even being revised up. It makes it a more equity-friendly environment.”

While Ardagh intends only to float on the New York Stock Exchange, the return of AIB to the Dublin market will mark the largest IPO in Ireland since the €8.4 billion flotation of Telecom Éireann, subsequently Eircom and now Eir, in 1999.

Eir mutations

Eir went through five changes of ownership before it was forced to file for examinership in 2012, in which €1.8 billion of its then €4.1 billion debt mountain was written off and its senior lenders, a group of private equity and hedge funds, took control of the business.

Eir made an abortive attempt to float for a third time in late 2014. Its owners, then led by US private equity giant Blackstone, pulled the deal as they decided that they could extract more value by holding on to the company. Feedback from potential investors at the time pointed to an enterprise value, including debt, of €3 billion.

Eir, which returned to annual sales growth for the first time since 2008 in the year to last June, was valued at about €3.5 billion last year as Singapore sovereign wealth fund GIC bought a stake in the company. The firm, where New York hedge fund Anchorage is understood to now own as much as 49 per cent of the equity, is likely to seek to IPO again next year, its chief executive Richard Moat has said.

And businessman Denis O’Brien is also widely expected to make another attempt to float Digicel, the mobile carrier which operates across 31 Caribbean and Asia-Pacific markets. He abandoned plans for the highly indebted company to raise as much as $2 billion in an IPO in 2015 as would-be investors were demanding too much of the company in a volatile market. He is expected to try again for a New York listing next year.

For now, though, O’Brien is concentrating on turning around Digicel’s flagging earnings, which have been dented in the past two years by currency weakness across some of its main markets, including Jamaica and Haiti. Late last month, Digicel, whose €6 billion debt mountain is six times the size of its operating earnings, announced plans to cut 1,500 jobs, or a quarter of its workforce.

Denis O’Connor, the head of PricewaterhouseCoopers’ transaction services business, sees between three and five companies listing in Dublin this year.

Irish Stock Exchange

It would mark a welcome boost for the Irish Stock Exchange, which saw only one company join the market last year: Draper Esprit, the UK venture capital company. In 2015, PTSB, petrol retailer Applegreen, online booking firm Hostelworld and life sciences company Malin Corporation raised a total of almost €1 billion as they floated.

“Valuations drive the IPO market and valuations have risen over the past six weeks [on equity markets],” said O’Connor. “However, some sellers can have an over-optimistic view of the value of their business and when they get initial valuations pre-IPO, these do not meet their expectations.”

The Government, which will have a further 75 per cent of AIB to sell after the IPO, and Coulson and his team, who only plan to sell an initial maximum 7.8 per cent Ardagh stake, will pay the price if they are too greedy. The appetite for future share placements will largely depend on how the stocks perform after the IPO.

Almost one-third of shares offered in IPOs over the past two years are currently trading below their offer price, according to Kiernan.