After years of underperformance, few people were confident about the strength of the recovery in German ECM that became apparent in early 2005. But through a mixture of IPOs on the back of high oil prices, new structures, and the resurgence in M&A, Germany is finally back. With a strong pipeline for 2006 and REITs around the corner, things can only get better. Owen Wild reports.
Prior to 2005, Germany had not been a major source of ECM volumes for years. The amount of work banks put in to make this happen should not be underestimated, given that deals had not always received an easy ride and investors had not always made money. But with a much stronger performance in 2005, volumes look set to rise for the fourth consecutive year. The absence from the market of KfW, the German privatisation agency, makes these achievements even more significant.
Not all companies have had a smooth journey to the market, but all participants continue to see this as desirable. The struggle of IPOs such as DIY company Praktiker, which had to be repriced to gain local investor participation, highlighted that not all names would meet demand. The fact that the stock has since traded up 60% shows the underlying strength of the market.
The challenge for 2006 is to schedule deals to ensure there are a minimal number simultaneously chasing the same money. For the first time in several years, though, it is a matter of squeezing deals into available market windows, rather than bankers looking out of windows.
Germany accounted for 16% of Western European ECM activity in 2005, with US$28.8bn raised from 62 deals. This put Germany behind only the UK and France. The UK continues to see huge volumes thanks to its junior market AIM and international listings, while France was boosted by two utility privatisations that accounted for US$13bn of its US$37.9bn total. Germany is no longer punching below its weight and banks are increasingly focusing on maximising their presence in the country.
Credit Suisse, which recruited a team led by Achim Shaecker in mid-2004, is now seeing the benefits with three IPOs of its own last year. BNP Paribas appointed Nicholas Groen to head up German origination in January 2005 and is set to execute its first IPO in early Q2 as a result of that move. The IPO of software company SAF will BNPP acting as sole bookrunner, with Commerzbank in the syndicate. The result of such a focus is huge competition for some mandates, but also a wealth of other mid-cap names sourced by a growing number of originators.
Entry standard
The appearance of new names on deals is not just coming from international banks. Names such as Berenberg Bank and Equinet are becoming increasingly common on deals that just break the US$50m level, as well as more familiar names including DZ Bank and WestLB. This is expected to be accelerated by the re-designation and relaunch in October 2005 of the Regulated Unofficial Market as the Entry Standard. Initial deal volumes were small. The first IPO on the new exchange for Design Bau, the real estate company, through WestLB took place on the day the Entry Standard launched and totalled just €18.6m. But bankers expect deal volumes to rapidly grow to €50m as investors become more comfortable with the new standard.
Retail investors were hit hard by the collapse of the German markets between 2000 and 2002 and they had walked away from IPOs. Similarly, institutional investors were much more cautious about where they chose to invest. This led to a drop in activity across all levels, but particularly for smaller deals. Good performances in the past year for most deals and improving investor sentiment are expected to lead to greater interest in smaller deals, despite the less strict requirements of the standard.
“The Neuer Markt required full regulation,” said Herbert Harrer, banking and capital markets partner at Linklaters. “The collapse was not linked to disclosure.” While this is true, some observers consider the level of disclosure crucial to the success of this market segment. “Banks have to look carefully at the level of due diligence on Entry Standard deals. Some houses would do deals without a prospectus, but we and others wouldn’t," said Kay Steffen, head of syndication and corporate broking at DZ Bank.
Indeed in the case of Design Bau, the deal was little different from those completed on the Prime Standard. The company met those reporting and disclosure requirements but because it was small, it felt it was better suited to the junior segment. But the shareholder list does include names that also invest in US$3bn companies.
The presence of a prospectus is no guarantee that everything is right with a company. The past year has seen several accelerated deals placed in a matter of hours which accounted for substantial proportions of a company in terms of percentage or days’ trading. These tended to comprise solely secondary shares, so some bankers argue that there is no need for a prospectus or significant due diligence.
“If the company is already listed and the deal is existing shares why should you issue a prospectus?” asked one head of German ECM. “You are simply recycling existing shares. Our view is can we place stock at this price – investors should have their own view on the company and its stock. It is not down to us to provide any guarantees.”
This position is not shared by all banks, but even those that do believe in the need for due diligence in this situation have seen investors get their fingers burned. In July 2005, Deutsche Bank completed an accelerated bookbuild in Grammer, the headrest and armrest manufacturer, which took the company’s free float from 17% to 100%. The deal was completed with a prospectus and a short marketing period, suggesting that Grammer was one of the few automotive suppliers not suffering from price pressures in the industry.
Just two months later, the company warned that earnings would be below expectations. It had previously stated earnings would be flat against 2004. The results, when published in February 2006, showed a 20% fall. From a placing price of €23.50, the stock fell to €16.50 and was hovering around €20 in mid-March.
Since then, the largest accelerated placing was for 25% of Techem by Goldman Sachs in early February. The success of this issue suggested that investors are increasingly robust and still willing to participate in such liquidity events. The Grammer placing also had little impact on Deutsche Bank, other than a few tough telephone calls. Perhaps investors had been softened to such price performance by the aftermarket experienced on the IPO of TV company Premiere.
IPO flow
The IPO of Premiere in March 2005 was initially deemed a success as it marked the first significant listing since Postbank. The deal was well covered and initially traded up but the company missed revenue and subscriber targets. The stock began to fall – not helped by Permira selling stock below the issue price – before collapsing. In December, the company lost its rights to Bundesliga football, which significantly devalued the business and left investors down over 50%.
The poor performance of Premiere has done little to block the IPO pipeline. All deals got done in 2005 even if some struggled, leading to a stronger pipeline this year. One house has more than 10 IPO mandates for 2006, with the intention of completing 15 listings during the year.
Part of the success of IPOs has come from the de-coupled process pioneered by Commerzbank and Deutsche Bank on the IPO of Conergy in early 2005. Throughout the year, Deutsche repeatedly used this process where the price range is not set until after investors meet management. There is a debate about whether this method boosts pricing as Deutsche Bank claims, but it does suit investors when there is a unique or complex story.
“The pricing achieved on the IPOs was probably little different from a conventional timetable,” said Roland Manger, managing partner at Earlybird, the private equity firm. Earlybird completed the IPOs of online mortgage broker Interhyp and gaming company Tipp24 through decoupled processes. “The opportunity to meet management early on certainly led to greater buy-in from investors. If a company has no listed peers, it is important for investors to be educated by management,” he said. This was underlined by participation in IPOs with the result that the book for Interhyp was 30 times covered with 380 lines of orders; Tipp24 was 15 times covered.
The strength of response to stories presented through a de-coupled process has led to wider adoption. Even though the impact on pricing is debated, banks including HVB and UBS have suggested the method to companies as a potential route for IPOs.
Prominent among the IPOs seen in 2005 were those for solar power companies, which saw massive demand even though they priced at up to 27 times 2006 price/earnings ratios. Further offerings from companies in this sector are expected to continue in 2006: Centrosolar, PV Crystalox Solar and Solarwatt are all considering IPOs.
The challenge in this area is concern over the sector overheating. Future growth is already priced in and companies will find it difficult to deliver in the short term. Bankers frequently mention the experience of the Neuer Markt when looking at multiples that have now reached 38 times earnings and where there is a lack of differentiation between companies. But this should change as companies are tested. "All solar IPOs have done well irrespective of the business model and positioning," said Matthias Born, portfolio manager at Deutscher Investment Trust. "The present constraints on supply help sales and prices, but these will decrease. Already we are seeing profit warnings so there will soon be good and bad companies."
In addition to solar, other renewable companies such as those covering biofuels are considering IPOs. November 2005 saw the first of these: Biopetrol Industries listed on the Entry Standard and raised €57.4m through Equinet.
Real estate beckons
Real estate is another sector that is expected to see a number of IPOs during 2006. Legislation is expected to provide for Real Estate Investment Trusts (REITs) from the start of 2007. Once a fund has raised money to finance investments in property, it can take several months to invest it. Because of this, investors are urging funds to come to market this year so they can invest money before converting to REITs. There will be a substantial increase in funds invested in real estate following REIT legislation so an early mover will benefit by investing before competition increase prices.
The introduction of REITs is significant in Germany as it will offer a better alternative to open investment funds that already exist. So far capital increases by listed property companies have achieved strong levels of demand. The IPO by Patrizia Immobilien in April looks set to meet similar interest though this is dependent on management, the most important factor in such deals according to investors.
IPOs are providing a constant stream of deals, but average volumes are low. Complementing the flow of new names is M&A activity often leading to significant equity transactions. Last year saw TUI, Allianz and Adidas all complete transactions in support of acquisitions.