Header image

IPOs remain off the menu in Europe, but follow-ons are trickling through

IPOs in Europe have been almost non-existent this year. As the war in Ukraine rages on and the macro-outlook worsens, investors are unwilling to place big bets on newcomers.

However, European primary equity markets saw an uptick in deals in recent weeks, bringing year-to-date issuance to US$20 billion, according to Dealogic.

Today is reminiscent of 2020, when markets were shaken by the pandemic and many stocks desperately raised working capital. Hopes are high that investors will continue to step in now, as they did then, to support familiar businesses that already sit in their portfolios.

Supermarket sweep

Recent deals include a €705 million rights issue from French automotive supplier Faurecia to fund its acquisition of competitor Hella, as well the £576 million accelerated primary placing from UK grocer Ocado to fund growth. Lower down the pecking order was a €122 million rights issue by French REIT Foncière Inéa.

The Ocado trade was driven by a small group of large shareholders, while Faurecia announced that its cash call was 187% oversubscribed, showing that there is strong support for the right capital raises.

Counting on discounts 

One way to draw interest to these equity deals has been to offer discounts to TERP—a stock’s “theoretical ex-rights price”, the estimated market price a company will have after the rights issue.

This approach was employed by Air France-KLM when the French-Dutch airline last month raised €2.26 billion from a capital increase, the discount being offered to ensure the issue price could withstand market volatility.

But this is not always an option. Italy’s Saipem and Banca Monte dei Paschi di Siena are two of the big names in Europe’s rights issue calendar. These deals are expected to be so dilutive that banks cannot set a wide discount to TERP as a buffer.

Even deals with a growth angle are not immune to current market stress. Last month, Elia System Operator, a Belgian company that develops and operates electricity networks, began sounding out investors for a €590 million rights issue. The company launched the deal at a subscription price of €124.50, implying a tight discount to TERP of 12.2%.

Until further notice, IPOs remain off the table. Capital increases are an option, but investors want to see discounts that may not always be possible.