UK set for record year for IPOs as investors search for companies to benefit from returning consumer confidence.
Britain is on track for a record year for flotation’s as companies press ahead with initial public offerings (IPOs) despite signs of investor fatigue.
So far this year, 40 companies have raised £5.7bn after the market for new shares went into overdrive following years in the doldrums, figures supplied by Thomson Reuters show.
The total for 2014 so far easily outstrips the previous £4.9bn record for the same period in 2007 and the £2.9bn equivalent in 2006, which went on to be the all-time biggest year for flotation’s.
At the previous full-year market peak in 2006, 134 companies raised £12.1bn. The total fell to £10.7bn the following year and then plunged to £505m in 2008 as the financial crisis hit its peak.
Year-to-date figures for 2014 do not include Lloyds Banking Group’s flotation of its TSB business. The bank is expected to publish the prospectus for the long-awaited IPO on Monday. The sale was forced on Lloyds by the European Union after the UK government waived competition concerns to let Lloyds rescue HBOS in early 2009.
TSB is expected to be sold below book value in an attempt to entice buyers and the sale of the first tranche of 25% of the shares is likely to value the business at between £1.12 and £1.44bn – between 0.7 and 0.9 times its book value.
Detailed figures in the prospectus are likely to show that TSB is making some of the lowest returns among high street banks and is not expected to make profits or pay dividends until 2017. The IPO comes after the collapse of a planned sale to the Co-op of the TSB branch network, as the scale of the purchaser’s troubles emerged.
TSB will be spun off with 631 branches, about 6% of the banks nationwide, while it only accounts for 4% of the current account market.
Other flotations in the pipeline include the AA, which published details of its IPO on Friday. Property website Zoopla, discount retailer B&M and easy Hotel, the budget hotel chain, are also set to list in the next few weeks, despite increasing wariness from investors swamped by new offers.
Ivor Pether, a senior fund manager at Royal London Asset Management, said: “I’ll be looking at TSB closely because it’s a forced disposal, and the market knows that Lloyds has to sell the rest by the end of 2015 so it has to be priced attractively. This IPO has to take off because if the first tranche is a flop it’s a very poor precedent for the other 75% they will be selling later on. That means we may get the IPO discount we would expect and that we haven’t been getting in a lot of other issues.”
The market was gripped by IPO fever in the first few months of this year as investors threw off years of caution in search of companies that could benefit from the recovering economy and returning consumer confidence. Retailers and online businesses were high on fund managers lists.
But after initial enthusiasm, investors have become wary of the valuations placed on companies by their sellers’, which are often private equity firms seeking to unload businesses they bought before the financial crisis.
Simon Gergel, head of UK equities at Allianz Global Investors, said: “Many of the recent IPOs have gone at a premium. I look to see a good reason to buy the business given that investors have far more information than the buyers. In most cases the vendors know the business and they pick their moment.
“You often get a lot of IPOs towards the top of the market. The valuations in many areas are looking a bit extended and investors need to be careful.”
Game, the video game retailer owned by a US hedge fund, on Friday priced its flotation at the bottom of the 200p to 212p range it had proposed to investors the day before.
Fat Face pulled its planned IPO last month after investors refused to meet the £400m-plus price demanded by the casualwear retailer’s private equity owners. Saga, the over-50s insurance and travel business, was forced to value the company at the bottom of a price range its buyout firm owners had already cut under pressure from investors.
Fund managers started driving a harder bargain after several recently listed companies’ shares fell below their IPO prices, ringing alarm bells about pricy valuations.
AO World, the online kitchen appliance and TV retailer, signaled the return of IPO fever when it floated in February. Its shares rose by more than a third on the first day of trading but the shares have been below the float price for two months.
Other high-profile floats to leave early investors short changed include retailers Pets at Home and Card Factory and online takeaway food service Just Eat.
The market picked up to £8.04bn last year, helped by the successful flotation of insurer Direct Line and the high-profile listing of Royal Mail, whose shares surged by more than a third on the first day of trading.
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