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Europe’s equity markets are showing some signs of relief

Two headline rights offerings are bringing renewed hope to Europe's beaten down equity markets. Earlier this month, French-Dutch airline Air France-KLM announced that it had raised €2.26 billion from a capital increase, while telco firm Millicom International Cellular launched a rights offering last month worth some US$750 million.

These rights issues follow several primary financing deals in the accelerated market, including a deal by German travel operator Tui in early May to repay government pandemic support loans and a capital raise by Swiss packaging company SIG Group to part-fund two acquisitions.

Deal value may still be well below average, but Q2 issuance so far has grown significantly compared to an anaemic first quarter.

Proceeds with caution 

It's far from a free-for-all. The market is open to primary equity issuance if there is a clear rationale for the fundraising. Companies cannot raise willy-nilly.

But when there is a clear use of proceeds—or, even better, if a planned capital raise has been previously announced—markets are receptive since they know what to expect. The quality of the company in question also helps. For example, in May, Siemens Energy announced a bid to fully acquire Spanish-German wind engineering company Gamesa and said the offer would entail €2.5 billion financed with equity or equity-like instruments.

Credit crunch 

With stocks having taken a bruising through 2022, valuations are looking highly attractive for deals. The only problem is that credit markets have also taken a dive as investors fled to lower-risk, lower-yielding paper.

As debt becomes more expensive and staring down the barrel of monetary tightening, companies are turning to alternatives, like cash or equity raises, to finance these deals.

Provided investors buy the M&A investment thesis being sold and the quality of the acquiring company is solid enough, as is the case with Siemens, there shouldn't be a shortage of demand for these rights issues.

Until further notice, however, cast iron equity stories are critical for these rights offerings to succeed.