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Thursday, 14 December 2017

London calling

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Essar Energy’s London listing marked a key moment in the overseas expansion of India’s biggest companies. However, the deal also highlighted the challenges in bringing a big emerging markets IPO to the mature UK investor base.

The £1.3bn (US$2bn) IPO of Essar Energy was far from an assured success. The deal was launched into a European equity market still finding its feet, while the complexity in unravelling Essar Energy from the Essar Group also put off some investors. The company needed to revise its price target to get the deal over the line, but Essar’s ability to weather a stormy market should encourage others to follow suit.

Essar was the first Indian firm to head to the main market in London since Vedanta Resources floated in December 2003. In between, Indian companies had settled for listings on the junior AIM market or less regulated GDRs. However, for over two years prior to Essar Energy’s move to London, Indian companies had preferred to stay at home as issuers and investors around the world shifted their focus onto domestic consolidation rather than international expansion.

Indian issuers are accustomed to strong demand at home, and that dynamic means only a few will consider a listing in the UK, where bankers see a very different environment.

“Indian firms are used to multiple-times covered deals domestically and we are telling them that it is difficult out here,” said one London-based banker, preparing Indian new issues. “There is something of a bubble in India, but the flow of Indians onto the AIM, particularly in natural resources, will increase.”

Essar, however, proved that there is confidence in the Indian growth story and that foreign investors will participate - at the right price.

“Essar Energy demonstrates the growing importance of large emerging economies, such as India, which continue to demonstrate strong growth in a post-credit-crunch world, and underscores the increasingly global ambitions of Indian corporates,” said a banker during the IPO.

Russia and the former Soviet countries have accounted for the bulk of foreign listings in London over the past five years, but European bankers are now expecting Indian floats to outweigh those from Russia.

One of the first names to join the London pipeline after Essar Energy’s debut was Vodafone Essar, the Indian mobile operator. However, after talking to banks, the prospects of a float receded.

In part, the deal may have been delayed because of Essar Energy’s own experience. The deal launched with a price range of 450p-550p, but, just before the end of bookbuilding, the price was revised to a fixed 420p. The move came despite the book being broadly covered at 450p, with the switch providing additional comfort on coverage. Proceeds then fell to £1.3bn from an original target of £1.6bn.

Despite the price cut, the stock’s performance was not encouraging, with the shares making their debut on May 4 and closing on May 6 at 396p. Bookrunners Deutsche Bank and JPMorgan used part of the greenshoe to support the deal in the aftermarket, which helped to lift the stock gradually above its issue price, and the it rose steadily through June to hold above 460p late in the month before falling back below issue in early August.

The weakness in the trading will make the largest deals more difficult, but bankers are looking for a steady flow of issuers of smaller deals on AIM.

The strength of investors’ interest in Indian companies on the junior market was illustrated by the success in completing a £37m IPO for iEnergizer during the last two weeks of August, when no other new issues were even in the market because of the summer break.

Offshoring company iEnergizer found strong demand from UK institutions, and a positive debut is expected on September 14. Investors were buying into the growth story, without any concern that all the stock on offer came from the founder and chief executive. Other European deals have struggled when displaying similar dynamics, with the suggestion that all-secondary deals reflect a belief on the part of the vendors that the share price is unlikely to rise further.

Bankers working on Indian floats said that UK investors responded well to the Indian growth story. Indian issuers enjoy a strong response than, for example, Russian companies – thanks to a familiar legal environment, language and culture.

Another factor seen to be important with iEnergizer was the lack of a fixed price range. Pricing of 116p per share resulted from dialogue between investors, the seller and lead bank Arden Partners. The approach avoided the impression a valuation was being foisted on investors and was part of the reason the deal could complete at a time when most investors were on their holidays.

If the firm can make a solid debut and show investors an early profit, then those that follow can expect to be welcomed.

Owen Wild




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