Finance Awards 2013 - Senior Equity Advisory Firm of the Year - UK

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Acquisition International

The European IPO and new issue market is experiencing its first real boom since the meltdown.  As a consequence, a growing number of issuers are coming to the market from a wide range of sectors, but inevitably not every deal will get away successfully.

The risk of loss of value for issuers from a poorly executed IPO process is significant. A company offering its shares to the public market for the first time only gets one chance; failure to price can be catastrophic for the business and its reputation, but equally pricing too low and seeing the shares ‘pop’ 50% in the first week, is equally clear value destruction. So, what makes the difference between success and failure?

Achieving success is neither simple, nor down to pure luck. Capital markets can be opaque and misunderstood, meaning that it is often difficult to pinpoint the ingredients for a successful deal. It is here that the role of purely independent and specialist advisers becomes important.

The need for expertise is demonstrated by the most experienced and frequent users of capital markets, such as private equity firms, increasingly calling on a helping hand when it comes to launching an IPO. More than 50% of European IPO’s now use an independent adviser.

In this respect, winning the UK Senior Equity Advisory Firm of the Year award from Acquisitions International is a positive affirmation of the value that STJ Advisors can bring to a transaction.

It recognises that the particular style of independent advice that STJ has pioneered has come of age within the capital markets. It also shows that issuers and vendors are increasingly choosing to supplement the advice they receive from investment banks with advice from a firm that offers relevant and specialist experience; STJ Advisors has 11 former heads of Equity Capital Markets teams of most of the largest Capital Markets banks.

The increasing demand for independent advice also shows that there is a growing understanding from issuers that STJ Advisors does not compete with investment banks, but is complementary to the services they offer. By working closely together with the banks STJ Advisors can help achieve the optimal outcome; where the IPO prices within its targeted range and trades up reasonably within the first few weeks of trading.

With IPOs being successfully completed again, the question is how can vendors ensure they get the most out of these transactions?

Every equity capital market transaction is different, but there are certain common factors that can help make a deal successful.  Success should be measured as a “win-win” for everyone involved – the issuer, sponsor, investors and the investment banks that are so important to the deal.

Achieving this win-win requires the issuer and bank/sponsor to have complete transparency in the IPO or new issue process. This is important because an offering is an auction and like any auction it is vital to know who is interested in buying, why and at what price.

Are the potential investors experts that will be long-term investors for the shares? Or are they speculators looking for a quick profit? Do the buyers have concerns that should be addressed? Are there any conflicts of interest? Is it possible to manage these conflicts? These are all important questions.

Data plays a key role in answering these questions. Investment banks working on an IPO gather a great deal of information on which investors they can educate, who they feel should be in the book, what feedback those investors have about the deal, the price range and many other factors.

If this information is fully transparent to the issuer and sponsor of the deal, it enables better decision making on the crucial aspects of the IPO process.

First, it can aid the selection of a banking syndicate that can offer the best expertise for the transaction and investor coverage, not only for the selling process, but just as importantly, for the aftermarket.  By using the banks’ own views of where their relationships lie and matching this with investors’ rankings of analysts, an issuer can appoint a syndicate which best matches the needs of issuers and investors.

Second, it allows the empowerment of the banks to identify and educate the broadest possible market and ensure that multiple calls to the largest investors are minimized. Furthermore, by aggregating feedback from all investors, issuers can build a picture of the total demand at a given price for a particular share in a certain industry and geography. This information can also improve decisions regarding allocation of the shares.

Third, a broader education of investors helps create a stable and healthy aftermarket. While it is natural that not everyone will enter the book at strike for a variety of reasons, an investor who knows about a stock and receives research on it both during and after the selling process will be better placed to buy in the future.

Finally, looking at all this information on a daily basis allows the issuer and sponsor to react to investor feedback, and identify any potential issues before they become problems.

Analysing this data is important, as there is a lot of it. While the size of the book varies deal by deal, in many deals feedback is received from 300-1,000 investors. With each investor giving information to
two or three different banks, this can result in several thousand lines of feedback.

Being independent helps allow this information to be shown in an objective fashion, so that the issuer can access the collective view of the market on the important decisions concerning positioning, pricing and other key metrics.

The end result of this is an IPO that has an optimised price, a broad book of long-term investors, and a strong and stable aftermarket.

So what does this look like in practice? STJ has worked on a number of transactions that exemplify this approach, with the award winning IPO of Ziggo in 2012 a good example, and most recently, Matas in 2013, both pricing well in the range and trading positively in the aftermarket.

In both cases, STJ worked with the banks to ensure careful targeting of the broadest possible pool of potential investors, allocating to a strong book of long-term demand at the right price.

For Ziggo the process began almost a year prior to the eventual launch of the IPO. A critical component of STJ’s advice was on the timing of the transaction. There had been a number of occasions when the company had been close to launching the deal, but through STJ’s proprietary data-driven approach it was clear that the market was not ready.

The best advice sometimes means recommending difficult decisions (like delaying a launch), but STJ always has data to back up better decision making. In Ziggo, STJ conducted a comprehensive investor mapping exercise to get a full picture of the market, identify the demand pool and then promoted conducting early-stage marketing by the company and the banks to ensure the ground was prepared for the deal.

When the moment was right to pull the trigger, STJ could show empirical evidence from the banks and ultimately investors that the appetite was there and give the vendor the confidence to push ahead.

In bpost’s IPO, this transparency was particularly critical given the private equity sell-down of a Government owned asset, with a number of stakeholders and different pressures compared to a more conventional IPO. The broad data not only ensures that the deal will not ‘fail’ to price within the range but also ensures that significant value is not left on the table by the issuer.

Not only IPOs benefit from these techniques. With alterations to reflect the nature of the transaction, they are also highly effective in relation to rights issues and follow-on offerings. For example, In recent times STJ has advised on the Banco Popular rights issue and a follow-on offering of shares in Dufry. Both relied upon the experience of STJ’s senior partners to adapt their techniques to work effectively with the banks to achieve success for the client.

This process is becoming an established part of the market. Capital markets never stay still, however, and STJ is committed to continual innovation, to ensure that it can always look at the interests of the offering and achieve a ‘win-win’ outcome, where investors are happy, investment banks are happy and issuers are happy.

This is where the value of independent advice for IPOs lies: working for issuer clients, but above all else working for a successful offering.

6 January 2014

Expert advice to the most sophisticated issuers.