Germany 2005 - Innovate to succeed
German ECM activity is set to jump in 2005, according to bankers and investors, confident that the market cannot continue to underperform its neighbours. But is there any real justification for the improved sentiment and expectations of IPOs, M&A-driven capital increases and privatisations? After all, there was a similarly upbeat mood a year ago, but 2004 brought only 28 deals. Owen Wild reports.
At the start of 2004, bankers were confident that sentiment was improving, that there was a strong pipeline of IPOs, and that rising equity markets would encourage companies to use equity as a source of funding. However, many of the expected deals fell foul of an increasingly sour market, and Germany disappointed.
One problem was that investors and the local media combined to push down valuations. “Part of the problem in Germany was that fund managers were quoted in the press with at times very negative opinions on deals,” said Andreas Bernstorff, co-head of German ECM at Dresdner KW.
On several occasions IPOs were either pulled until the market was more favourable, or sold to private equity firms flush with cash. Car parts firm ATU began its €500m IPO, only to cancel two weeks before pricing, and motorway services station operator Tank & Rast was ready to launch for several months before being sold as a trade sale.
Oil and gas concern EWE was delayed to 2005 due to poor sentiment, and bathroom fittings company Grohe was sold through a trade sale – both deals had been expected to be up to €1bn. TUI decided that 2004 was not the time to spin off its shipping subsidiary Hapag-Lloyd, and Wacker Chemie took the same view on its semiconductor company Siltronic. As a result, German deals totalling more than €4bn failed to come to market last year.
The fact that some of those planned IPOs ended up in the hands of trade buyers or private equity firms was little surprise given their surplus cash. But that may not continue. “There is huge competition with private equity, but it’s peaking. Debt markets are not paying for risk, so it is difficult to compete – but debt is reaching the end of the boom,” said Georg Hansel, head of German ECM at Deutsche Bank.
With each failure or postponement, market sentiment fell further, ensuring that all the three sizeable IPOs that did get away struggled. The €390m IPO of Wincor Nixdorf was the only one to price inside the marketed range, albeit at the bottom.
The beneficiaries in this struggle were investors. “Wincor Nixdorf has traded up over 50% since the IPO, and Deutsche Postbank is up almost 30%. Retail investors are increasingly realising that they can earn money with IPOs again,” said Deutsche Bank’s Hansel.
That has helped to build momentum for the coming year, as has a revival in activity in Q4 2004, when government agency KfW began its privatisation activities for the year. As a repeat issuer, KfW is an important contributor to German ECM volumes and knows when it is a good time to act.
“The better the market, the better the chance to pursue further deals. We were out of difficult markets for more than three years between 2000 and 2003,” said Gunther Braunig, head of KfW’s equity holdings. “There are limited market windows available to us and we need good sentiment for a placement.” But sentiment improved sufficiently for KfW to place €4bn of Deutsche Telekom and €1.15bn of Deutsche Post.
Other features of the market were a rescue rights issue from department stores group Karstadquelle; the selling of a cross-holding in TUI by WestLB, and a family sale in metal parts company Rheinmetall. The appetite for equity was clear even if competition for new listings was still tough, and this has already translated into a busy Q1 for 2005.
Going forward, bankers are convinced that there needs to be more effort when bringing new companies to market, something on which the exchange operator Deutsche Boerse agrees. DB runs a forum each autumn for late-stage companies and institutional investors that attracts over 100 companies. They can meet investors ahead of listing, something that should improve awareness and price expectations – still a thorny issue.
“We are now seeing deals that are attractively priced, unlike last year where investors were not willing to pay the price. If we see several at a good price, then investors will be there,” said Rainer Reiss, head of new issues at Deutsche Boerse.
Valuation has been an issue, highlighted by deals collapsing and pricing out of the marketed range, but some companies appear to be willing to adjust their expectations. Biotech company Paion moved the bottom of its IPO price range from €11 to €8 in January. During bookbuilding it became clear that investors were not willing to commit within that price range, so the company revised its expectations to ensure a successful listing and the ability to raise equity in the future.
Bankers keen to avoid such a situation are looking to take a more customised approach to the IPO process. A greater number of one-on-one meetings with investors has been a trend for some time.
Another issue is management of the IPO process. Last year, sentiment was damaged by dual-track processes in which an IPO and a secondary sale were both publicly pursued. Now bankers are attempting to keep all deals out of the spotlight until launch. This was seen on the rights issue by HeidelbergCement and the IPO of renewable-energy company Conergy.
“If there is too much talk around a transaction it is often not good, it is better when you keep to the facts. Ideally you should try to decide on the nature of the deal before it enters the public domain, but often it is not possible and then you follow a dual-track,” said Katja Kraust, equity syndicate banker at Commerzbank.
Lead banks Deutsche and Commerzbank also adjusted the timetable of Conergy’s offer to improve investor education before setting a price range. As a result, the banks completed two weeks of pre-marketing and then began a week of management roadshows without setting a price range or beginning bookbuilding. This meant investors met with the company before valuation was brought into the equation. For a high-tech company, consensus on valuation is crucial before beginning bookbuilding.
German companies such as Siltronic are expected to copy the IPO process pioneered by French yellow pages company Pages Jaunes. That involved competitive pre-marketing in which many banks provide price feedback, the objective being to ensure a more accurate price range. Bookrunners are only appointed when the bookbuild begins. The method is thought to be attractive to private equity sellers keen to maximise price, but some suggest it would work even better for spin-off IPOs where the company is already known through its parent. This approach was considered for the €1.179bn IPO of Premiere in early March, but jettisoned thanks to existing bank relationships.
The success of the Premiere IPO is expected to have huge significance, especially given the high retail participation. Around 15% of the Postbank IPO went to retail, but Premiere moved that up to 30%.
“The burst of the Neuer Markt [growth market] bubble [in 2000] still makes medium-sized deals difficult,” said Nicholas Groen, managing director in ECM at BNP Paribas. “You need healthy retail participation in mid-size transactions, as hedge funds won’t [come in] due to lack of liquidity. In a way, €50m deals can be more difficult than those of €500m.”
However, Commerzbank’s Katja disagrees about when retail is important: “If a deal is €100m–€150m, then it is more important to gain long-only funds as long-term holders and hedge funds for liquidity. Retail is less price sensitive but also has less knowledge,” she said. As a result retail is important to bulk up larger deals, but is not necessarily suitable for sub-€200m deals where there may be greater risk.”
The possibility of retail involvement in privatisations remains slim. The privatisation agency is unwilling to offer preferential terms given the exceptional terms that KfW has achieved through accelerated bookbuilds.
“ABBs were the tool of the market in 2004. As an issuer we cannot afford to leave out attractive bids from auctions. The fact that banks make them shows that they are used to the competition and still on average make money out of them,” said KfW’s Braunig. “It is often a question of momentum on the day. When momentum is there, deals can be priced very aggressively, even above the previous close.”
As a result the privatisation agency is expected to continue to sell its multi-billion euro holdings in Deutsche Telekom through ABBs, but may consider more varied transactions for the vastly less liquid Deutsche Post. Bankers are touting a variety of structures for the latter stock that would provide for retail participation without requiring discounts such as attaching non-tradable warrants to a share sale. One factor is the failure of banks to place any warrants in the market during the last DT placement.
One area for future growth comes from the prospect of Real Estate Investment Trusts (Reits) listing in Germany from January 2006. Reits are a structure for property portfolios that is both tax efficient and attractive to investors due to the requirement that 90% of income is distributed to shareholders annually.
“At this point there does not seem to be a downside to Reits. There are currently property funds but they are not liquid. When funds are taken out they have to sell property,” said Ute Gerbaulet, co-head of ECM at WestLB.
According to Dresdner’s Bernstorff, Reits will provide liquidity and improve returns, which could lead to corporates and banks adopting the structure for their own real estate portfolios in addition to straight property funds.
On balance, there are reasons for guarded optimism about German ECM in 2005. But after years of disappointment, that would be a result.