Is the float market about to roar back to life? Only 11 companies, all small, have applied for admission on ASX. But behind the scenes is a huge amount of Initial Public Offerings (IPO) activity, which could make 2013 the best year for floats since the Global Financial Crisis (GFC).
The caveat, of course, is for the sharemarket rally to continue. A rising market will unleash well over 100 IPOs this year and my bet is at least a dozen will be for larger offers that attract fund managers and a wider base of retail investors. Expect one of two blockbuster billion-dollar floats as well.
The IPO market is coming off a dreadfully low base. About $1.3 billion was raised through equity IPOs in 2012 – the worst performance in at least a decade and well down on the $2 billion raised at the peak of the GFC in 2008. Just over 40 companies listed in 2012, compared with 103 in 2011 (excluding debt issues, compliance listings and fund offers).
Terrible IPO conditions could quickly change. Expect more IPOs late in the second quarter of 2013, once fund managers have digested the interim profit reporting season and have more time to study new offers. A second, bigger wave of IPOs will come in the traditionally busy fourth quarter as companies race to close their offer before year end.
There is no shortage of candidates, big and small. Seek has announced it wants to float its Chinese holding, Zhaopin, this year in a deal that could value it more than $700 million. Although Zhaopin is likely to list on the Nasdaq or Hong Kong stock exchanges, it shows that Australian companies are increasingly eager to create value through divestments and test the IPO market.
Poultry producer Inghams Enterprises is another rumoured IPO, although a trade sale is thought more likely in a deal that could value it at $1 billion. Inghams looks an ideal IPO candidate given the strength of its brand and investor appetite for agribusinesses that can capitalise on population growth in Asia and a sharp rise in the number of middle-class Asian consumers.
Newspaper reports suggest that Asia Pacific’s largest in-vitro fertilisation business, Virtus Health, is gearing up for a $500 million float by mid-year. If the price is right, the offer looks certain to attract fund managers who are aware that demand for in-vitro fertilisation will grow as more women have babies later in life.
Another key IPO, iSelect, is thought to have pushed back the timetable for its offer to the second quarter. The insurance and utilities information company should attract investors eager for more internet-based companies to list on ASX, given the success of REA Group and Carsales.com.au.
Other likely small and mid-cap floats include mining-services company Golding Contractors; insurance broker Steadfast; car-leasing group FleetPartners; biotech Vibrynt; and Riversdale Resources.
But it is the potential for billion-dollar IPOs, such as Nine Entertainment Co, Energy Australia, Genworth Financial (Australia) and McAleese Transport, that most excites. These IPOs have been mooted for a few years, but weak sharemarket conditions saw plans abandoned or deferred. Some seem likelier for next year.
The Australian sharemarket’s 28 per cent total return over one year is creating a window to get large floats away. As confidence slowly recovers, and more investors return to the sharemarket in search of higher yield, conditions are improving for IPOs that need retail investors.
Institutional investors are also eager for large IPOs that provide more investment options on ASX, and to boost their investment performance by getting priority allocations in better-priced floats.
Although demand for IPOs will rise this year, many obstacles remain. The first is the lingering negative perception of private equity-vended floats resulting from the poor performance of the Myer Holdings and Collins Food IPOs.
Corporate advisers have responded by restructuring private equity-vended offers to address the concerns of institutional investors. Last year’s $75-million IPO of mining-services company Calibre Group was a good example. Its majority shareholder, US private equity firm First Reserve Corporation, agreed to a voluntary escrow of its stock until Calibre lodged its full-year accounts for 2012-13.
The IPO market’s second hurdle is funding competition. One reason for so few floats last year was the ability of companies to raise capital elsewhere. Debt markets thawed, trades sales picked up, and private equity firms increasingly bought assets off each other, meaning there was less urgency to launch a costly, time-consuming, uncertain IPO in a volatile stockmarket.
The third hurdle is retail interest. Anecdotally, retail investors are returning to the sharemarket to find higher income-producing investments as rates on bank term deposits fall. Whether that interest will extend to unknown companies or smaller offers is yet to be seen. It may be still too early for companies to test retail investor appetite for smaller IPOs.
The fourth hurdle will be pricing expectations. In the 2002-2007 bull market, the traditional IPO discount of about 10 per cent off the company’s true value was whittled away. Even in the 2008-2012 bear market, some of the largest floats were aggressively priced. Investors will need more pricing incentive to return to floats despite the latest market rally.
Also, expect some changes in how IPOs are structured and launched. For one thing, vendors will most likely keep a larger stake in the company for longer to demonstrate their interests are aligned with new shareholders. This is a more common practice in the US.
Other floats will avoid a general public offer and offer stock only to institutions and clients of preferred sharebrokers. Such floats will open and close quickly with less fanfare. Also, more companies will run a dual-track mandate, with an IPO and trade sale considered to maximise the price.
At least the IPO market is back in the game if the sharemarket rally gets its second wind. After five years of IPO turbulence, pent-up demand to raise capital and list on ASX is huge.
Click on the links below to read other articles from this week’s newsletter
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.