Hopes of an Autumn revival in Europe's new listings market have taken a step back, with cancellations by two German firms this week showing the gap between what investors are willing to pay, and what companies think they are worth, is as wide as ever.
A string of stock market listings across the globe have been blown off course by the volatility of financial markets in recent months, as investors steer clear of risky bets while the euro zone crisis casts a shadow over global growth prospects. Just $4.8 billion has been raised from IPOs in Europe so far this year, an 86 percent decline on the same period in 2011 - itself a poor year for new listing activity - with many firms having given up even trying to brave the markets.
With European stocks at multi-month highs, German insurer Talanx was the first to test the waters as investors and bankers returned from the summer break, with those working in the market saying several other big companies were poised to follow suit. Talanx didn't like what it found, however, pulling the listing after just 10 days on Wednesday when it became apparent the price investors were willing to pay was more than 10 percent below the lowest value it was prepared to accept.
Two days later, German defence group Rheinmetall also scrapped plans to sell a stake in its car parts division KSPG. One source close to the deal said Rheinmetall was facing having to price KSPG at a 35-40 percent discount to what it considered fair value, and this was too much for it to accept.
"Investor appetite for IPOs is I think quite low ... People haven't made a lot of money in IPOs, that's the bottom line," said one fund manager. The cancellation of Talanx's offering, a swift about-turn from last week when its chief executive Herbert Haas said it would take an "earthquake" to unravel the IPO plans, was unexpected and highlighted the perennial tension over price between banks, investors and companies hoping to list.
Unusually, the company deviated from the tradition of citing market conditions as the reason behind its decision, laying the blame squarely with the banks. "Investor feedback on the company's valuation deviated significantly from the estimated minimum fair value that had been communicated to Talanx by the investment banks managing the transaction", the company said in a statement.
Citigroup, Deutsche Bank and J.P. Morgan were the lead banks running Talanx's initial public offering (IPO). They all declined to comment. Those working on the offering responded by saying the company had been unrealistic in its views on price. "Investment banks did not paint a too rosy picture", one banker working on the deal said, adding it would have been possible to bridge the gap in valuation but Talanx was unwilling to budge.
The public spat over Talanx was a reminder of the ill-feeling and distrust which plagued Europe's IPO market last year and prompted both investors and banks to put forward suggestions to help smooth a company's ride to market and try to restore confidence between sellers and buyers.
Companies and banks have spent more time this year canvassing earlier and more comprehensive feedback from investors, but the dearth of deals has left bankers under pressure to try to win mandates and get offerings over the line. "Investment bankers, to get the business, will pitch high in terms of what they will tell the company what they can get for it. If you are in a particularly competitive tender for (an IPO), then you can get a bit carried away," said the fund manager.
Despite the difficulty of finding a middle ground on price in such choppy markets, Britain's state-backed Royal Bank of Scotland said on Friday it was pushing ahead with plans to float its Direct Line insurance division. As a forced seller RBS, which must offload more than 50 percent of its shares in Direct Line by the end of next year as part of a European Union directive in return for taking state aid, is likely to come under even more pressure over price. "This hard deadline they have makes them a bit more vulnerable to investors," said one source close to the deal.
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