North America Secondary Equity Issue: Centene’s US$2.86bn follow-on

If spin-offs are designed to illuminate value, Eli Lilly’s IPO of Elanco Animal Health shone bright for both parent and subsidiary. By the time the formal roadshow kicked off in mid-September, institutional investors were familiar with Elanco’s plans to wring cost savings out of the business. Elanco management had also conducted extensive pre-deal investor education that gave early momentum from a core 20 accounts. Goldman Sachs, JP Morgan and Morgan Stanley, the leads among 11 bookrunners, built upon momentum over a 10-day public roadshow with 50 one-on-one meetings and more than 200 institutions overall. The effort culminated in 62.9m being shares priced at US$24, above the US$21–$23 marketing range, with exercise of the 9.4m greenshoe extending Eli Lilly’s take to US$1.7bn, the largest US-listed healthcare IPO since Pfizer spun-off Zoetis in 2013. Elanco was not only among the largest IPOs of the year but the most lucrative as well, as its shares closed their debut session 50% above offer at US$36 and in mid-November were still up 38% – stated differently, that is some US$660m in paper profits. “It was one the best books of demand I’ve ever seen,” said Gabriel Gelman, head of Goldman Sachs’ healthcare origination. “Investors like spin-offs in terms of how they can perform, particularly from companies that are on the other side of a turnaround. “Most believe there is still room for significant improvement in operating margins.” Unlike most spin-offs, the former parent and subsidiary are in the same sector, providing overlap not only on research coverage but also on ownership. As a result, many Lilly shareholders put up their hands wanting to buy. While there are substantial differences between Elanco and Zoetis, the positive experience on the latter meant investors could see a possible path for Elanco. In the past year, Elanco generated adjusted Ebitda of US$517.7m, a 17.5% margin compared with 39.3% at Zoetis, with many investors expecting Elanco to close that 20 percentage point gap. Elanco management has worked hard to restructure its business by pruning unprofitable business lines, consolidating production and R&D, and reducing headcount. A consequence has been revenue flatlining at around US$3bn over the past three years, but rather than growth for growth alone, the company’s focus has been on enhancing profitability and growing through new products. The move was lucrative for Eli Lilly, which sold 20% of Elanco through the IPO, with the remaining 80% to be distributed to shareholders tax-free 180 days later. Elanco set its standalone capital structure with US$2bn of debt sold in August, followed by a US$500m term loan. Those funds, plus the IPO proceeds, flowed upstream to Lilly, with a small portion held back to leave Elanco with US$300m in cash. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

Brazilian payments provider PagSeguro Digital redrew the boundaries in Latin America’s primary equity markets with its US$2.6bn IPO, opening the region’s tech space to a global audience and laying the ground for a string of similar names to follow. In a rare US listing from Brazil, PagSeguro defied past experience in selling LatAm securities and positioned itself among global and US tech investors hungry for new opportunities in emerging markets. LatAm IPOs have typically lured only emerging market-dedicated accounts, local investors and on occasion sovereign wealth funds. “It was the first time in all my years as a banker that we were able to get crossover investors – US tech funds, growth funds – actually buying into a Brazilian stock,” said Facundo Vazquez, co-head of LatAm ECM at Goldman Sachs, which acted as sole global coordinator. Bank of America Merrill Lynch, Bradesco, Credit Suisse, Deutsche Bank, Itau BBA and JP Morgan were bookrunners. Confidence in a global bid with a broader mindset made all the difference in January when Brazil’s polarised electoral landscape was starting to dampen appetite among EM accounts and locals for the country’s assets. Reaching traditional buyers was made harder once Brazilian regulators prohibited in-country roadshows unless the stock was listed locally. “We weren’t shy to find the very best fintech investors all over the world,” said Lyle Schwartz, who runs Goldman’s LatAm ECM business alongside Vazquez. “We let them compete for the asset and create scarcity, and ultimately price the transaction at levels that exceeded the client’s expectations.” Such accounts liked PagSeguro’s disruptive potential as a provider of technology solutions for small and medium-sized companies in a Brazilian financial sector still dominated by big banks. An order book of US$25bn allowed the company to upsize the deal to US$2.6bn, making it the second largest IPO of a non-US issuer on the New York Stock Exchange and the biggest float out of Latin America in four years. In a rare move for LatAm issuers, PagSeguro priced above the range (pricing at US$21.50 compared with the US$17.50–$20.50 range). It proved a big payday for the banks, which shared US$91m of underwriting fees. Many of the US accounts, which made up 74% of the book, had never bought a Brazilian stock before, bringing a fresh view to the LatAm market and better valuations for the company. The final IPO price valued PagSeguro at 24 times forward earnings, well over local peers such as Cielo, as tech investors instead looked to US comps such as Square and PayPal, which at the time traded at 90 times and 36 times over earnings. “Very little was placed locally because all the buyers at higher values were offshore,” said Schwartz. “We demonstrated that we could take a Brazilian asset and execute it on a global standard.” To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

Dutch payments firm Adyen brought some sparkle to EMEA IPOs in 2018, enticing investors with its lean US-style listing, star-studded client base and meteoric growth in a year otherwise dominated by established industrial heavyweights and corporate spin-offs. At €946.9m, its Euronext Amsterdam listing was the sixth largest IPO by deal size, but the spectacular rise in its share price makes it the best-performing stock to go public in Europe this year. As of November 15, shares were up 114% from IPO pricing, valuing the company at around €15.1bn. At 140 years younger on average than the other five companies to achieve billion dollar listings in 2018, Adyen stands out from the crop, making do without the reputation and tangible assets that benefited this year’s other praiseworthy IPOs. Instead, it offered its unique status as an agile tech firm with a glittering client base containing some of the world’s largest tech outfits such as Uber, Netflix and Spotify. Earlier in the year, eBay had even signed up with Adyen in place of its former subsidiary PayPal. “It almost doesn’t matter if Adyen grows its client base or not – it still grows, say, 35% because their clients do,” said Magnus Andersson, head of cash ECM coverage for EMEA at Morgan Stanley. Morgan Stanley – occupying a US-style lead-left slot – and JP Morgan were joint global coordinators, and joint bookrunners with ABN AMRO, Bank of America Merrill Lynch and Citigroup. European investors grabbed the opportunity to play the US tech titans without the single-name risk and in their home market. An avalanche of demand was evident from queues out the door at marketing events that translated into over 500 lines of demand. The IPO was covered in an hour, priced at the top of its range and the shares closed their first day up 90%. The structure of Adyen’s IPO was as unique as its client list. Bucking Europe’s trend for 25% free-floats, it opted for a typical US tech style listing, offering just 13.4% of the company to investors – a decision that also reflected the difficulty in convincing any shareholders to sell. The idea was to create a pop on the first day of trading, with the scarcity of shares creating a feverish aftermarket. Crucially, pricing at 48 times 2018 earnings was far from cheap, especially in the European context, and key US peer Square had delivered a 600% return from IPO to earn its 70 times multiple. Other concept stocks that looked to achieve punchy pricing later in the year found their listing experience turn sour once trading began. The float also helped turn the tide in Europe when 12 IPOs had cancelled in the previous two months. Too few events put money in investors’ pockets through the year, yet Adyen’s float created enormous value for old and new shareholders. And investors were soon calling on shareholders directly to break the lock-up and sell more. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

With FIG recapitalisations off the menu for the first time in years, a wave of M&A-based equity financings was expected to replace them in 2018. That wave, though, failed to materialise with just a few exceptions. And Cineworld was certainly exceptional. The UK cinema chain announced a transformative acquisition of US peer Regal Entertainment Group in early December 2017 for an equity value of US$3.6bn, taking its 2,227 screens up to 9,542 and accessing the US box office with annual takings of more than US$10bn. Doing so involved a £1.72bn rights issue that was larger than Cineworld’s market capitalisation of £1.54bn and would keep leverage in check at four times, well up from 1.5 pre-deal. The result was a hefty four new shares issued for every one share outstanding at 157p, a 34.1% discount to TERP. A volume underwrite from joint bookrunners Barclays, HSBC and Investec in early December provided Cineworld with comfort from the off that the deal could go ahead. “This was the most challenging risk in a very long time,” said Tom Johnson, head of EMEA ECM at Barclays. The rights issue was the largest in the UK since December 2015 and the second largest in EMEA in 2018 behind Bayer’s long-awaited €6bn capital increase in June. The initial response was poor, with shares falling 20% when the deal was leaked. Having the Greidinger family, Cineworld’s largest shareholder with a 28% stake, onboard at announcement a few days later was vital. Barclays provided a margin loan that allowed the family to remain whole. A deal that shot Cineworld from mid-cap to the fringes of the FTSE 100 index meant the banks couldn’t simply write a cheque and wait for shareholders to come in. There was no need to expend much effort on securing votes for the acquisition with the family already on board, which allowed everyone to focus on take-up. Management completed a global roadshow, meeting more than 115 investors between deal announcement and setting rights issue terms. The result was a 96.3% take-up, an exceptional result even in a good market, which was rarely the backdrop in 2018. The VIX volatility index jumped from 13.47 in the days before subscription began to 37.32 on day one, before falling again to 20.60 by the day after subscription wrapped up. As a rule of thumb, ECM struggles once the VIX pushes above 25. Even the rump showed heavy demand, with the top 10 orders taking around two-thirds of 40.38m shares sold at 238p, flat to the TERP at launch. Shares topped 320p in October. “For a UK mid-cap, this showed an unprecedented level of ambition,” said Johnson. The same can be said of the banks that shouldered the burden against a shocking tape and the investors that bought into Hollywood’s dream factory. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

The HK$3.8bn (US$485m) IPO of Innovent Biologics proved Hong Kong could support major listings of pre-revenue biotech companies. Although not the first – or the largest – its flawless debut revived the stock exchange’s efforts to create a sustainable new sector. Hong Kong Exchanges and Clearing in April introduced new rules to allow the listing of dual-class shares and pre-revenue biotech companies with at least one product beyond the concept stage. Fourteen, mainly Chinese, biotech companies rapidly filed for Hong Kong listings. The first few deals, however, were disappointing, casting doubts on the city’s nascent effort to become a biotech listing hub. By November 15, shares of Ascletis Pharma, the first such listing under the new rules, had tumbled 42% since their August 1 debut. Hua Medicine and BeiGene, the other two newly listed biotech firms in Hong Kong, were 7.1% and 29% below their IPO prices, respectively. Temasek-backed Innovent, an anti-cancer drug developer with four antibody products in late-stage clinical trials, was the fourth biotech listing in the city. The offering was closely watched as another failed listing could well have shut the market. To raise its chances of success, Innovent secured 10 cornerstone investors for a total of US$245m, or 58%, of the float. Singaporean state fund Temasek, an existing shareholder, invested a further US$20m in the IPO. Other cornerstone investors included US venture capital firm Sequoia, Capital Group, Value Partners and Vivo Capital. The company also set a realistic valuation target, of about US$2.1bn at the top of the HK$12.50–$14.00 price range. That was much lower than the fair value guidance of up to US$3.8bn from one of the IPO sponsors during pre-marketing. Books, excluding the cornerstone tranche, were more than 10 times covered. Despite the overwhelming demand, the company priced the offer slightly off the top at HK$13.98 per share to raise HK$3.3bn, clearly with an eye on secondary performance. About 90% of the shares were allocated to long-only funds and healthcare specialists, 8% to hedge funds and 2% to others. The stellar aftermarket trading performance of Innovent threw a lifeline to biotech listing hopefuls, raising investors’ confidence in the sector. The company ended its first day of trading on October 31 with a 19% gain to HK$16.58. The stock hit an all-time high of HK$22.70 on November 15, or 62% above the issue price. A 15% greenshoe was subsequently fully exercised, raising an additional HK$496m for the issuer. China Merchants Securities, Goldman Sachs, JP Morgan and Morgan Stanley were joint sponsors. The four banks were also joint global coordinators with Huatai Financial and HSBC was a joint bookrunner. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

In a year when Hong Kong’s stock exchange passed reforms aimed at boosting its appeal to technology companies, it is fitting that the city’s biggest tech stock should be at the heart of the most significant – and impressive – deal of the year. Naspers’ HK$76.95bn (US$9.8bn) sell-down in internet giant Tencent Holdings showed that Hong Kong can compete on a level playing field with the world’s biggest equity financing venues. Asia-Pacific’s largest overnight block trade smashed a record in Hong Kong that had stood since Vodafone sold a HK$50.9bn China Mobile stake in 2010. It is also the third-largest on record anywhere in the world. The March 23 share sale was also the first from South African media and entertainment company Naspers, which had seen its US$32m investment in 2001 balloon to US$175bn. The deal was launched a day after Tencent announced its quarterly results. Slowing gaming revenues worried investors, dragging down the shares by 5% before the sell-down was announced. After months of preparations, joint bookrunners Bank of America Merrill Lynch, Citigroup and Morgan Stanley nevertheless went ahead and launched the offer of about 190m secondary shares, or about 2% of the company. Unlike a typical block trade in Asia, the deal was launched on a best-efforts basis without any wall-crossing and no price range at launch. Naspers, which still owns a 31.1% stake in Tencent after the trade, also said it had no intention of selling any more shares for at least three years. This allowed the banks to build a genuine, global book from the outset, creating competition among investors and ultimately leading to greater price tension. Launching without a price range also gave the leads more flexibility on pricing, which was critical to the deal’s success given that the Dow tumbled 2.9% during bookbuilding after Donald Trump announced fresh tariffs on Chinese goods. Tencent’s American depository receipts were still trading in the US, while Naspers – which trades largely as a Tencent proxy – is quoted in Johannesburg. Despite the challenges, the block was covered a few hours after launch and ended well oversubscribed with more than 300 investors participating. About an hour before the books closed, the leads issued guidance of HK$400–$410 per share or a discount of 6.7%–9%. The shares were eventually priced at HK$405 each, or a 7.8% discount to the pre-deal close of HK$439.40. The top 20 investors took around 60% of the deal and the top 10 bought 40%. Demand came from global top-tier long-only funds, sovereign wealth funds and hedge funds. Geographically, about 55% of demand came from Asia, 38% from the US and 7% from Europe. Tencent closed at HK$420 the day following the sell-down, a 4.4% drop on the day, but left investors who took part in the deal comfortably in the money. Naspers got the best of the bargain, however, after Tencent retreated from its first-quarter peaks. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

Canadian medical cannabis grower Tilray’s eye-catching Nasdaq debut in July legitimised cannabis as an institutional investment theme and proved a missed opportunity for Wall Street banks unable or unwilling to bank the emerging industry. But not for Cowen. The New York-based mid-market investment bank was already well aware of the cannabis industry and its global potential, proving nimbler than rivals to lead what was easily the year’s hottest and most talked about IPO. Cowen senior research analyst Vivien Azer was first to identify cannabis’s explosive growth potential in a ground-breaking initiation of research on the industry two years earlier. The view then, and now, was that the industry was a logical extension of a healthcare research practice. “We are a research-driven firm,” said Larry Wieseneck, co-president at Cowen and a longtime Lehman Brothers/Barclays banker who joined Cowen in late 2017. “We unabashedly believe in the value of our intellectual content and it has to be combined with real muscle.” Through a series of high-profile hires, Cowen has 10 analysts at managing director level in the healthcare group, covering everything from biotech to large pharma as well as diagnostics and medical devices. Overall, the bank covers more than 900 companies across seven verticals. Rivals, particularly at bulge-bracket firms, complain that Cowen “overpays”, but that only underscores Cowen’s dedication to research. With US Attorney General Jeff Sessions in January labelling cannabis a “dangerous drug” and “marijuana activity” a “serious crime”, on the one hand, and Canadian federal government legalising the green stuff in October, on the other, the July float needed careful planning. Cowen outlined a very specific strategy to Tilray management. The first step was a US$55m private placement in January to provide standalone funding and create a Canadian-domiciled corporate structure distinct from US private equity backer Privateer Holdings. In March, Tilray confidentially filed documents with US regulators and began an extensive investor education campaign in preparation for the IPO that canvassed some 300 institutions globally. “Every time we mentioned cannabis to most institutional investors they would begin to giggle and laugh,” said Tilray CFO Mark Castaneda. “They didn’t believe it was a real industry.” Cowen followed with a 9m-share, all-primary offering in July that it priced at US$17, above the US$14–$16 marketing range, and that it allocated 75% to US institutions and the balance globally – all institutional investors. Tilray landed the bulk of its working capital needs with a US$475m five-year CB in October that printed with a 5% coupon and conversion price of US$167.41 per share, a 15% premium at the time and nearly 10 times the IPO price. Cannabis is but one part of the healthcare operation. Cowen bookran 16 healthcare IPOs that raised a total of US$1.9bn. The bank’s bookrunner share ranked it fourth in the sector (second by number of deals) ahead of many bulge-bracket firms. Include follow-ons and the bank logged 68 deals totalling a league table share of US$3.45bn to rank it 13th in the US combined equity league table. Arguably, no client has been as emblematic of Cowen’s emergence as Bluebird Bio. Building from a co-manager role on the IPO five years ago, Cowen capped a long-standing relationship with a bookrunner slot on Bluebird’s US$632.5m follow-on offering in July. “If you work with the best companies and do a good job for them, they will come back to you,” said Grant Miller, Cowen’s head of capital markets. Allogene Therapeutics, a clinical stage biotech, is among the next generation of drug developers. In October, Cowen helped the company raise a mammoth US$372m on its IPO, the largest-ever by a biotech in that stage of development.

If Peel Hunt’s equity team was nervous about the consequences of Brexit – and the messy exit process – it certainly didn’t show. Together, they raised over £2bn for 30 clients and snagged sole bookrunner roles on two of the best performing European IPOs. “At the start of the year, the most-shorted position in the BAML fund manager survey was volatility, now it is the UK,” said Alex Carter, head of equities at Peel Hunt. “International investors are underweight UK. But for UK investors it is business as usual – they say ‘if we see an issuer we like at the right price, we’ll buy’.” The numbers speak for themselves: Peel Hunt deals (with the odd exception) rise in the aftermarket from day one onwards. US mobile payments platform Boku and UK financial adviser platform Integrafin, the two best performing UK floats of the awards period, were trading 97% and 51% above their IPO pricing respectively as of the close on November 23. Peel Hunt put its ability to discern sentiment in the UK mid-cap investor base on full display this year. Accurately detecting appetite for a niche US tech stock in London, the broker convinced San Francisco-based Boku to defy convention and list in the UK.  While Boku was tiny with just 40 employees, its clients – Apple, Google, Facebook, Microsoft and Spotify – were anything but. Yet UK investors were cautious about the loss-making firm when a peer wasn’t delivering growth. An initial round of meetings aroused interest but the bank opted to put the IPO on hold. Six months later the company went back to investors with new numbers showing strong growth and quickly built momentum. Their judgement was vindicated when huge demand saw the deal upsized from £30m to £45m. CROSSING THE ATLANTIC Peel Hunt has subsequently hosted events in Seattle and California to promote the opportunity for other “swimmers” to cross the Atlantic. Research is at the heart of Peel Hunt’s offering and, while an implausible number of banks claim to be beneficiaries of MiFID II unbundling, the broker can prove it. Peel Hunt is now selling to 844 accounts, up from 450 last year, and downloads have more than doubled. On a like-for-like basis, revenues are up an estimated 10%. In the small and mid-cap space highly rated analysts are sought after. On the IPO of Bakkavor in November 2017, Peel Hunt was a junior in a six-bank syndicate, yet its analyst completed more than half of the 180-plus meetings in pre-marketing. Bain Capital hired Peel Hunt to work alongside JP Morgan on its first post-IPO sale of shares in TI Fluid Systems. Peel Hunt hadn’t worked on the IPO and four global banks that did were overlooked. “The quality of the analysts is crucial. We want to be number one in each sector as that attracts the best institutions and that brings the best issuers,” said Alastair Rae, co-head of ECM syndicate. Peel Hunt faced an additional challenge on Integrafin’s £178m IPO in terms of keeping the deal going when it was unclear if there was going to be any stock available. In the end, enough of the 630-strong shareholder register was convinced to sell 27% of the company but there was no certainty and still the sole bookrunner was able to build a multiple times covered book. When shares popped 29% on their debut, trading volume represented only 13% of the deal, showing how well allocated it was. Brightening up a dull August, Peel Hunt single-handedly raked in £60m for University of Oxford spin-off and NHS data partner Sensyne Health, despite its negligible turnover, lack of peers and complex story. Securing a £225m market cap off revenues of £800,000 required a remarkable feat of story-telling. The bank was clearly emboldened by earlier heroics as the first day of IFR’s review period marked the debut of ready-meal supplier Bakkavor. The bank resurrected the £261m IPO days after it was cancelled, going so far as to offer hard underwriting for the full deal size. Peel Hunt could make that offer because it reached investors the more senior banks