If the stars align, value of floats this year could exceed $10 billion.
The Australian sharemarket’s weak start to 2014 has not dented the appetite for IPOs. If the market recovery continues, expect a rush of floats in the second and fourth quarters – and possibly the strongest IPO market in a decade as a few billion-dollar offers are launched.
Predictions about Initial Public Offering volumes always depend on the sharemarket’s strength. Volatility is the enemy of new listings. If the sharemarket pullback in January turns into a 10 a per cent correction, still a risk in my view, the second-quarter float market could slow.
IPO indigestion emerged last year, given the rush of new offers, and more fund managers have lately criticised the pricing and volume of IPOs. A race to the exits by vendors, particularly private-equity firms, is always cause for concern, although many larger floats performed well last year.
Also, the 2014 market has had a slow start, with hardly any listings. The ASX website shows only a handful of tiny IPOs, and there have been reports that the IPO market is slackening, despite the fact that the first quarter of each calendar year is by far the weakest for floats.
However, equity capital market chiefs have told me the IPO market is still building as vendors look to sell assets into a rising market. Yes, investment bankers always talk up their book, but it would not surprise if a huge pent-up supply of IPOs continues to be unleashed in 2014.
There are no concrete signs that vendors have lost their nerve to float assets, or that institutional investors are reluctant to support fairly priced floats of good companies. Talk of a weak IPO market in 2014 looks premature. If the stars align, the value of IPOs this year could easily exceed $10 billion; more if a few blockbuster floats are launched.
IPO observers might have expected a slower year after the recovery in 2013. Last year’s IPO market was the most dynamic in a decade. About $9.7 billion was raised from 60 IPOs in 2013, on my numbers, with a huge rush in the traditionally busy fourth quarter. I excluded compliance listings, debt IPOs and others that do not raise capital, from overall IPO values and volumes.
That was a remarkable turnaround from 2012, when $1.2 billion was raised from 44 listings, thanks to a volatile sharemarket, a slumping resource sector and weak investor interest in new listings.
Key drivers for higher IPO supply in 2014 include a solid sharemarket and a shortage of larger investment opportunities to absorb fund flows from superannuation. Institutional investors are eager for more IPOs – at the right price, and provided there is sufficient time to digest them.
A few large floats seem likely in the second quarter after analysts and fund managers digest the interim profit-reporting season in February.
Australia’s second-largest hospital operator, Healthscope, is reportedly gearing up for a $4 billion IPO, which would make it the largest float since the QR National privatisation in 2010. With advisers being appointed, an IPO looks the most likely sale option at this stage.
An IPO of Medibank Private, potentially worth $3-4 billion, could have a huge bearing on the 2014 float market. A scoping study is due at the end of the month, and the Federal Government clearly wants to put the health insurer on the block to raise much-needed funds.
Healthscope and Medibank Private alone could get 2014 a long way towards last year’s capital-raising levels. More importantly, both would be “blockbuster” floats that attract wide interest and a larger number of investors. The Medibank privatisation, in particular, could bring retail investors back to the IPO market.
Blockbuster IPOs were notably absent from the 2013 market. The closest Australian asset was the $636 million IPO of Nine Network Entertainment Co. Pact Group Holdings, Cover-More Group, OxForex Group, other decent-sized floats, were not well known among retail investors.
Small and mid-size industrial floats, a mainstay of last year’s IPO market, should feature again this year. A potential $400 million float of fitness wear chain Lorna Jane is a possibility as bankers reportedly pitch for roles.
SG Fleet, a rival to McMillan Shakespeare, tested institutional investors this month for a $200 million IPO. Its price was cut by 10 per cent by per cent to get the float over the line, as fund managers baulked at the initial valuation.
Another salary packager, SmartGroup, is mooted to float late in the second quarter, as is childcare operator Sterling Early Education in a IPO possibly worth more than $200 million.
Other rumoured contenders include accounting software giant MYOB; perennial IPO candidate Link Market Services, another touted billion-dollar offer; facilities management business Spotless, which could still be some way off; Seek’s education business; and media intelligence business iSentia.
Although the IPO pipeline looks reasonably full, it would stall if the sharemarket heads below 5,000 points and investors lose their appetite for new listings. But at this stage, the IPO market, while not raging, looks to be racing towards a decent second quarter.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at February 6 2013.
Click on the links below to read other articles from this week’s newsletter