Italian ECM to grow in 2013 but poor outlook for IPOs
Political uncertainty coupled with continuing weak markets in Europe will only allow slight increases in Italian ECM activity in the coming year, while IPOs will continue to face difficulties, according to a report published by DealReporter.
Next year will see Italian corporates turn to rights issues, accelerated book-builds and equity-linked products to finance M&A, strengthen their capital and refocus their core businesses.
Concerns surrounding the outcome of the Italian elections in late February will freeze the ECM market at least for the first three months of the year, said the sources.
“The political uncertainty will have an impact on the perception of foreign investors and on the attractiveness of the Italian market,” said Clifford Chance partner Alberta Figari. “There is a high risk of an unstable government that might put pressure on the markets.”
A banker was more optimistic, saying that several issues, including the US fiscal cliff and the Spanish bailout, should be resolved early in the year, allowing the mist to settle on the markets by the last quarter at the latest.
The outcome of the Italian elections is not as risky as some expect, since the majority of parties agree that future policy and reforms should follow the guidelines set out by the current Prime Minister Mario Monti.
“The real event will be the German elections in September,” the banker said. Merkel will likely end up in a coalition with the Social Democrats, a much more pro-European party than the German Chancellor’s current coalition partners, the banker added.
One company that has presented all its regulatory filings and would be ready to launch next year is luxury notebook maker Moleskine, while there are rumours that luxury names such as Monclair, Dolce & Gabbana, Armani, Ermenegildo Zegna, Versace, Pomellato as well as publisher Grafica Veneta could follow suit, said the sources.
The undervalued European market closes off many opportunities, said the third banker. For most successful IPOs you require European corporates to trade at an average price-to earnings ratio of between 15x and 20x, but the European markets are now averaging at 10x price to earnings.
“You need at least two good quarters in a row in order to launch an IPO,” said the first banker, adding that the first two quarters of 2013 will be full of uncertainties for Italy. He added that a relatively large IPO was needed to open up the market for smaller listings, the sorts of listings that are more common in Italy.
The expected listing of engine manufacturer Avio could have been one such opener. After months of IPO preparations, Avio’s private equity owner Cinven concluded that it could not get the valuation it sought in the market and sold it to General Electric for a total consideration of EUR 3.3bn. The highest enterprise value the market was willing to offer was EUR 3bn, according to the first banker.
One large ECM operation expected in the coming year is the sale of the remaining 20% stake that Italian energy company Eni [ENI IM] has in gas distributor Snam [SRG IM].
While part of that stake could be sold to sovereign wealth funds, there is the expectation that some will be disposed through an accelerated book-build or a secondary public offering. The stake held by Eni is worth around EUR 2bn.
Other block trade candidates are some of the minority stakes held by insurer Fondiaria Sai [FSA IM], which is in the process of being taken over by rival Unipol [UNI IM], said the first banker. Fondiaria has 3.87% in Mediobanca[MB IM] and 4.48% in Pirelli [PC IM].
While on the investor side there is also a lot of appetite for convertibles, it is not clear which names could come to the market.
There will be a massive inflow of funds to convert investors, pointed out the third banker. “A lot of paper is coming to maturity in coming months… and they are redeeming in cash because the equity market has gone down since 2007.”
This excess of cash in the hand of convert investors could also open up the market for exchangeable bonds, even though they are much harder to structure, the banker added.
Italian holding companies such as Exor, CIR, Edizione or Fininvest that want to monetize some of their stakes could look at this kind of instrument, said the first banker.
The drying up of bank credit means that many Italian names are going to need to find alternative forms of financing, said the second banker. “The Italian system relies heavily on bank credit,” he said. “As that liquidity dries up, much of the refinancing will have to be done through capital markets and convertible bonds are among the most looked at instruments by corporates.”
The article was written by Emiliano Mellino, Alessandra Castelli and John West.