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ANALYSIS: Europe’s IPOs Down, While SPACs Nearly Halt

Aug. 8, 2019, 12:14 PM

European IPOs posted poor results by nearly any measure during the first half of the year, contrasting sharply with a U.S. IPO market enjoying stellar growth. Volkswagen’s cancellation of its Traton SE trucks division may be consistent with—and a contributor to—this trend.

IPO Market in Europe Falters Amidst a Slowing European Economy

Mirroring Europe’s anemic economic growth, IPOs in Europe have hit a rough patch that seems likely to worsen.

In the first half of 2019, issuers priced only 71 IPOs, raising $15.9 billion. These results are down substantially from the first half of 2018, when 168 IPOs priced, raising $31.5 billion. However, second quarter IPO activity represents a relatively healthy rebound from the borderline comatose IPO market Europe experienced during the first quarter of 2019, the worst quarter since the depths of the financial crisis in 2009.

The first half numbers seem even more tepid considering that 2018 IPOs in Europe declined significantly in count and total money raised compared to 2017. Meanwhile, the U.S. IPO market was on fire in the second quarter of 2019. US IPO activity for the first half of 2019 was roughly equivalent to the same period in 2018 despite a partial U.S. government shutdown either delaying the processing of offerings by the SEC or causing companies to delay their filings.

The lone bright spot? The average deal size in the first half of 2019 was actually up, averaging $224.9 million versus an average deal size of $185.1 million in 2018 and the $184.3 million average deal size of 2017. That trend mirrors the increasing IPO deal size in the U.S.

The three largest IPOs pricing on European exchanges during the first half of 2019 were:

(1) Italian payment-service company Nexi SpA (priced on April 12, raised $2.32 billion);

(2) Chinese company Huatai Securities Co Ltd (priced on June 14, raised $1.69 billion), the first listing under the Shanghai-London Stock Connect program; and

(3) UAE payment solutions company Network International Holdings (priced on April 10, raised $1.59 billion).

Brexit concerns have weighed on London listings. Network International is the first large company to list in London so far this year.

IPO Deal Count Off Sharply in 1H 2019

In the first half of 2019, the consumer (non-cyclical) sector was the most active with 18 IPOs. While the financial sector has usually led in recent years, it came in behind consumer (non-cyclical), totaling 12 initial public offerings. Despite leading the other sectors, these totals represent noteworthy declines compared with results since 2013.

The industrial sector was close behind financial, with 11 IPOs so far this year. The industrial sector edged out technology, which finished tird, a spot it had held since 2016 when it took that seat away from the consumer (cyclical) sector.

The top IPOs by dollar value in each of the three top sectors in the first half of 2019 were:

(1) Consumer, Non-Cyclical: Swiss medical device maker Medacta Group SA (priced on April 12, raised $1.53 billion);

(2) Financial: Italian payment-service company Nexi SpA (priced on April 12, raised $2.32 billion); and

(3) Industrial: Swiss train manufacturer Stadler Rail AG (priced on April 4, raised $592.6 million.

IPO Deal Value Falls Well Behind 2018 Pace

In the first half of 2019, the financial sector continued to raise more capital in European IPOs than any other sector—and by a large margin. The value of Nexi SpA’s IPO topped all other IPOs in the first six months.

The communications sector outperformed recent history, finishing in the top three sectors for total value of IPOs for the first time since at least 2013. Trainline PLC, the second biggest U.K. listing in 2019, led this sector. Industrials dropped to the third spot from second spot in 2018, raising a total of $2.25 billion.

The top IPOs by dollar value in each of the three top sectors in the first half of 2019 were:

(1) Financial: Italian payment-service company Nexi SpA (priced on April 12, raised $2.32 billion)

(2) Communications: British online train ticket retailer Trainline PLC (priced on June 21, raised $1.37 billion)

(3) Industrial: Swiss train manufacturer Stadler Rail AG (priced on April 4, raised $592.6 million)

Trend Reverses, Percentage of Small IPOs Increase in Europe

In the first half of 2019, smaller IPOs in the $1 - $100 million range reversed a two-year trend, when IPOs in that band shrank relative to other tranches. This year, the number of smaller IPOs increased from 65% to 69% of all public offerings. By contrast, this trend away from small IPOs has continued on U.S. exchanges.

Interestingly, the percentage of mid-size IPOs ($100 – $500 million) experienced a sizable decrease in the first half of 2019 while very large IPOs ($1 - $10 billion) increased substantially, from 3% in 2018 to 8% of all IPOs. Mid-size IPOs pared down nine percentage points, from 29% in 2018 to 20% of total priced IPOs during the first half of 2019. The percentage of IPOs in the larger $500 million - $1 billion range defied recent history, halving its percentage to 3% after having remained steady at 6% from 2015 to 2018.

Out of 71 IPOs in the first half of 2019, 49, or 69%, were in the $1 - 100 million range by offer size; 14, or 20%, were in the $100 - $500 million range; two, or 3%, were in the $500 million - $1 billion range;, and six, or 8%, were in the $1 - $10 billion range. No issuers reached the highest bracket for IPOs by raising $10 billion or more in their offering.

SPACs Stumble and Tumble Down to Just One in 1H 2019

Special Purpose Acquisition Companies—the blank check company that pools funds to finance M&A transactions—have continued to dazzle U.S. investors. By contrast, Europe priced only one SPAC in the first half of 2019: Gear 1 Spa. It raised the very modest total of $34.1 million. Those figures compare to 10 SPAC IPOs priced in Europe in 2018, raising $1.45 billion.

SPAC IPOs had grown tremendously in 2017 in number and value. The number of these deals shot up by 15, from four to 19 SPAC offerings, with deal value increasing by about $3.5 billion from $456 million in 2016. The SPAC IPO deal count declined in 2018 by almost half while shedding total deal value by nearly $2 billion.

More Difficulty for IPOs Likely in 2H 2019

The struggling market for IPOs on Europe’s exchanges faces increasing headwinds. After many years of synchronous expansion, slowing economic growth in Europe (albeit with some tentative, encouraging economic numbers in May), China and the United States threatens to bring about a worldwide recession. Collateral damage from the US and China’s still-escalating trade war is spreading in Asia and, to a lesser extent, worldwide.

Europe’s IPO activity has been waning, and the trend looks to continue with bad news begetting more bad news. In March, Volkwagen AG canceled a stock sale of its Traton SE trucks division, blaming market conditions and an auto industry slowdown. This IPO would have been Europe’s largest of the year and its removal is “spoil[ing] the mood for other European IPOs,” according to Guillermo Hernandez Sampere, head of trading at German asset manager MPPM EK, as reported by Bloomberg News.

Recent IPOs have garnered decidedly mixed results for investors, in contrast to the U.S., where the strong IPO market has broadly produced healthy early returns notwithstanding Uber’s dud of an IPO in May. The European market for IPOs looks tired. It may lack the strength to overcome setbacks, such as the pulled VW IPO, that the U.S. market would likely be able to take in stride, as it did with the recent troubled IPOs of Lyft and Uber.

Meanwhile, fears of a hard Brexit are quickly replacing Brexit uncertainty as the most significant negative for European capital and currency markets. The new Boris Johnson-led British government looks to be taking the U.K. full bore into a hard Brexit on October 31, 2019. Brexit uncertainty now centers primarily on how deeply negative, and for how long, a hard Brexit will be for the economies of the U.K. and the EU.

There are many reasons for investors to worry about the remainder of the year (and beyond), including moribund M&A activity on the continent. Still, investors can take heart that at least U.K.-U.S. M&A activity is thriving, private equity firms are moving in to pick up cheap stocks on Europe’s exchanges, pushing values higher, the European Central Bank is studying stimulus options, and Germany’s IPO pipeline has been described as “robust.”

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