Ziggo abandons European IPO model

Dutch cable operator Ziggo is set to abandon the four-week IPO process that has long been standard in Europe and instead opt for an accelerated – and far smaller – deal using the US model in an effort to ensure success when it launches next month. The change is a reaction to last year, when 27 major corporate IPOs – worth up to US$27bn – were cancelled in Europe.

Ziggo had hoped to complete a conventional IPO of €1bn–€1.25bn but after witnessing the huge failure rate of attempted European IPOs in 2011 it will instead complete a far smaller float in a compressed timetable.

The strategy envisages a small initial float with private equity owners Warburg Pincus and Cinven then exiting through a series of large follow-ons once Ziggo develops a track record as a public company.

Market conditions look good for IPOs as investors have seen positive returns for the first few weeks of the year and volatility is moderate, if off the lows of earlier this month. However, there was no significant IPO post-summer 2011 in Europe and bankers are nervous about macroeconomic events again disrupting deals during the traditional four-week gestation.

Bankers have been pondering the problem of completing European IPOs for the past six months, with several concluding that the American model offers a suitable alternative. Ziggo and its owners are the first to be convinced of its merits.

“There are aspects of the US model that are advantageous,” said Adam Welham, Barclays Capital’s head of ECM syndicate. “European IPOs are generally executed over a four-week period, and that’s not including the background work. The US model allows for a much tighter time-frame, which leads to a more flexible and efficient process in terms of market risk.”

Many European bankers, particularly those at US firms, have now come to the same conclusion.

Despite the recovery in stock indices there is still concern around investors’ willingness to buy into European IPOs, especially when lacking significant fund inflows

Despite the recovery in stock indices there is still concern around investors’ willingness to buy into European IPOs, especially in the absence of significant fund inflows. The first IPO of 2012 saw RusPetro raise US$250m through a club deal with a one-day bookbuild tacked on the end to avoid market risk.

Spot the difference

In Europe, companies traditionally complete a four-week public process consisting of a fortnight of pre-marketing followed by two weeks of management roadshows. Bookbuilding nearly always runs concurrently with roadshows. Companies typically secure a free-float of at least 25% at IPO, a level the FTSE Group now deems the minimum to secure inclusion in its indices.

By contrast, IPOs in the US are far smaller, normally comprising primary shares resulting in low double-digit free-floats. The absence of pre-marketing means IPOs are only live in the market for up to two weeks, minimising the chances of external factors scuppering deals.

Ziggo is expected to replicate the US model with a small free-float and primary shares dominating, while the timetable is also set to be shorter than four weeks, though it is not clear if there will still be some pre-marketing.

The US model is not a viable option for every European company looking for an IPO, particularly as US markets tend to be more liquid. But Ziggo is a suitable candidate for such a strategy.

Its sector is dominated by liquid well-established names from across Europe such as Telenet and Kabel Deutschland, which provide a high-quality peer group for relative valuation. Ziggo itself had a positive set of full-year results for 2011, with revenues up 7% on 2010 to €1.478bn and Ebitda of €834.6m, up 6.5%.

There are also several major Dutch accounts that know the company and are likely to anchor the deal. Some accounts have been met in preparation for launch.

Incredibly rare

Another advantage of the US-style process is that the IPO is in effect an introduction and the first trade that attracts broad investor interest is the first follow-on, at which point there should be several banks providing independent research on the firm. Independent research is desired at IPO but incredibly rare.

The major disadvantage is that the valuation would probably suffer on a smaller deal as investors would look to be compensated for lower liquidity and the overhang from knowing existing shareholders would soon look to sell. The problem is partly mitigated through an all-primary IPO where existing shareholders are less sensitive to valuation.

Bankers believe there is still scope for a traditional two-plus-two structure – Swiss firm DKSH is expected to pursue that route in its March IPO (see “DKSH to test European sentiment”) – but agreed that at this point it might be more prudent to cut down the risk period.

JP Morgan and Morgan Stanley are joint global co-ordinators and joint bookrunners on Ziggo’s transaction with Deutsche Bank and UBS. ABN AMRO, HSBC, Nomura, Rabobank and Societe Generale will be co-leads. STJ Advisors is the independent adviser.