Brit Bonanza on IPOs

The Brits have always been ready to prove that they are different. Mad dogs and Englishmen that go out in the mid-day sun and all that. But, this time, it looks as if there might be something better to look forward to than just scorched red cheeks and parched throats as well as a good old bout of sunstroke for them. They might just reap the benefits of a record number of Initial Public Offerings that are being prepared in the UK and which will be higher than any year since 2007. For anyone that has been living in complete social and international or geopolitical autarchy and reclusion, that was pre-financial crisis. So, the UK believes that they might just be back to a level that will enable sustaining the record number of IPOs that have already taken place this year and that will do in future months. But, will the markets be able to put up with that and is it the right time to go public already today?

IPOs

IPOs

UK IPOs

New research has shown that the UK has a volume of IPOs that now stands at an estimated value of $7.16 billion. The UK is now the first in the EMEA (Europe, Middle East and Africa) with regard to the volume of IPOs and it is the 4th in the world. IPO volumes have been multiplied by three this year alone in comparison with last year. In the EMEA there were some $15 billion that were raised in the primary sale of shares. Last year that figure only stood at roughly $5 billion in the area.  The Brits are on an IPO bonanza right now. But, they should be careful about flooding the financial markets with too many IPOs since there might just not be the stability yet to be able to deal with that.

When the financial crisis hit in 2008, it brought an end to the $14 billion that had been raised in 2007 in the UK through 98 IPOs that took place in that year. US investors provide between 30% and 40% of investment in UK IPOs today. As worries over the Eurozone debt crisis are starting to abate with improved economic growth prospects in the EU generally-speaking, US investors are looking to get better returns on their investment than companies in the US are currently able to offer them. But, that recovery is nowhere near maturity just yet. It isn’t even at toddler stage right now.

  • In the midst of a growing housing bubble in the UK, Foxtons (real-estate company in the country) was oversubscribed on Friday September 20th as they put 60% of their stake in the company up for grabs and managed to raise £335 million ($537 million).
  • No other real-estate company of that size has gone public in the UK since 1999 when the Canary Wharf Group was launched and its IPO managed to raise a staggering $988 million.

 

  • The UK postal service (Royal Mail Group Ltd.) intends to go public within the next few weeks making sure that it has the necessary capital to compete with rival companies not only in the UK but also in Europe. It will be a huge privatization plan as the government plans to sell of a major stake in the company. It will be the largest since British Rail was privatized in the UK twenty years ago. Royal Mail has been valued at £3 billion ($4.7 billion) according to sources interviewed by Bloomberg that wished to remain anonymous. There should be a minimum investment of £750 for retail investors and employees should be able to invest with a minimum stake of £500 (a 10%-stake in Royal Mail will be handed over to employees by the UK government for free).  Royal Mail has already secured two loans worth £800 million and £600 million from a syndicate of banks that are intended to provide financial stability in the first year of going public. The IPO should take place in 2014.
Chinese IPOs

In October 2012 the Chinese government banned Initial Public Offerings since investors were worried about reporting of finances by Chinese companies and the Chinese stock market was suffering from heightened volatility.

However, at one time the Chinese IPO market was the largest in the world (2009-2012) and it managed to reach volumes that were double that of the USA, dethroning the country from its top spot. There are currently 700 companies in China that have requested or expressed a wish to go public in the future. All of them are on standby until the China Securities Regulatory Commission (CSRC) headed by Xiao Gang finishes drafting the regulations that will be put in place to control the investment banks that will underwrite the IPOs.

The slowdown in the Chinese economy and growth that has been reduced means that the Shanghai Composite Index has dropped by a quarter over the past three years, with 12% this year alone. There is very little doubt about the fact that if massive IPOs take place in China today, then they will just bring the market down entirely.

Banks risk being penalized by the CSRC if they underwrite companies that subsequently see a drop in profits to the value of 50% at least within the year that follows the IPO. Bankers could also end up being banned for a period of a year in such circumstances. It is certainly a bold measure from Xiao Gang. Whether or not that will be possible to get the Chinese IPO stakes in order and the investors interested is another matter.

The question arises as to whether Initial Public Offerings are the best way to actually raise capital for a company and whether they should go public (in particular for state-owned companies such as Royal Mail). The Communication Workers Union in the UK stated: “Privatization is the worst way to access to capital as it’s more expensive than borrowing under public ownership […] it’s about vested interest of government ministers’ mates in the City”. There are 150, 000 workers at Royal Mail today and some of them may risk losing their jobs after privatization occurs. However, that sacrifice may well be necessary to get the state out of interfering in the free-market economics that should be running the sector.

  • Some of the biggest IPOs in history have included Visa that went public in 2008 on the New York Stock Exchange and that raised $17.9 billion.
  • General Motors went public in 2010 and it managed to raise $15.8 billion.
  • Japan saw NTT Mobile go public on the Tokyo Stock Exchange ad that brought in $18.1 billion.
  • But, it was in China that the largest recorded IPOs took place.
  • The Industrial and Commercial Bank of China went public on the Hong Kong and Shanghai Stock Exchange in 2006, bringing in $19.09 billion.
  • The Agricultural Bank of China went one bit further and raked in $19.23 billion when it was launched on the Shanghai stock exchange in 2010.

When the Chinese get back in the IPO business they will launch a succession of initial public offerings. If they don’t control them, the consequences will be dire. But, judging by what the CSRC is doing today, they are most certainly aware of the fact that regulations need to be set up and above all implemented.

By comparison, the UK IPO ratings will look more than being on the small side. 

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tothetick

Professional team of writers/analysts analyzing the financial markets.

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