Reuters: Regulatory News: Small could be beautiful for stock market debuts

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Small could be beautiful for stock market debuts Jun 13th 2012, 11:26 Wed Jun 13, 2012 7:26am EDT * European bankers facing drop in fee income from IPOs * Want to emulate U.S. practice of selling smaller stakes * Liquidity, protection for investors key concerns By Kylie MacLellan LONDON, June 13 (Reuters) - When British vacuum technology firm Edwards tried to launch on the London stock market last year by selling just over one third of its shares, choppy markets forced the company to pull its debut at the last minute. Undeterred, Edwards headed for the United States where more relaxed regulations allowed the company to shrink the size of the stake it offered investors to 12 percent. Last month, it floated in New York raising a less ambitious $100 million, rather than the 350 million-450 million pounds ($544-$622 million) originally planned for London. Fee-hungry investment bankers would like to try shrinking the size of initial public offerings (IPOs) in Europe to revive a major source of their income that is shrinking fast. But two things stand in their way: regulators that set a minimum IPO size and investors who need persuading that small equity sales are in their interests too. Bankers say the U.S. trend of companies selling a smaller stake at the time they join the stock market has helped keep IPO activity flowing there despite difficult markets, as sellers are willing to let their shares go more cheaply. "In the U.S. IPO discounts are high, around 30 to 50 percent. But issuers are tolerating those discounts as they are doing very small deals," an equity capital markets (ECM) banker said. The amount raised from U.S. IPOs is up 35 percent year-to-date on the same period last year, according to Thomson Reuters data. While the amount raised is boosted by Facebook's bumper $16 billion debut, the total number of IPOs is 17.5 percent higher than a year ago. In contrast, European IPO proceeds have tumbled 78 percent. Companies are reluctant to launch equity offerings for fear of having to sell large chunks of their stock cheaply into markets spooked by the euro zone debt crisis. "We need to see if we can do smaller issues in Europe," said a second London-based ECM banker. However concerns about liquidity and corporate governance have led most European stock exchanges to require companies to sell at least 25 percent of their stock when they list, in contrast to the less prescriptive U.S. rules. The minimum free float, the proportion of a company's shares freely available to trade, is aimed at protecting investors. A larger free float means a stock is easier to trade and ensures the company has a more diverse group of shareholders. ROOM FOR MANOEUVRE "Europe should reduce the levels," said the first banker. "If people want to float with less than 25 percent, and investors want to buy it, then they should be able to." Waivers are given in some cases, usually for large firms where regulators do not consider liquidity would be compromised. In March, Dutch cable company Ziggo was allowed to offer a stake of up to 20.1 percent in Amsterdam, although it increased this to 25 percent due to strong demand. Investors have suggested German chemicals company Evonik cut the size of its planned Frankfurt listing to help salvage its prospects of getting it done in rocky markets. "There is scope to experiment (on IPO size) but it will be driven by investor appetite," said Robert Darwin, a corporate finance lawyer at Withers. So far, that appetite seems fairly limited. "Sales of smaller stakes possibly could get the market moving again but the downside to that is if you haven't got a big free float, share prices can end up pretty volatile and that is a red flag for most investors," said Paul Mumford at Cavendish Asset Management. "If I was looking at a company that had a very small free float ... I would always have at the back of my mind that it could float more of those shares in the future. I'd worry about rushing in first time around in case I could get them cheaper second time around, unless it was a cracking proposition." An investor push for companies to require higher free floats to enter the prestigious FTSE UK indices in London saw the FTSE Group up the minimum to 25 percent from the start of 2012. It also said it would take fresh soundings on whether to raise the free float further. As well as the risk of getting stuck in an illiquid stock, which has at times been an issue on London's Alternative Investment Market where there is no free float rule, corporate governance has been a key concern in London. This is particularly with some large, foreign-owned resources firms such as Kazak miner ENRC, where ownership tends to be concentrated among a small number of powerful individuals. The Association of British Insurers and the National Association of Pension Funds (NAPF), whose members account for a large proportion of investment in the UK stock market, have complained some of these firms offer poor safeguards for minority investors, which include millions of Britons investing their retirement savings in funds that track major indices. "We have witnessed many companies listing in London in recent years which don't have any real connection with the UK ... In many cases, the businesses have proven to be highly cyclical, often having limited free floats, and some have caused us serious corporate governance concerns," said Euan Stirling, Investment Director at Standard Life. "We worry that this trend actually reduces the attractiveness of the UK market from an investor's perspective as it introduces a higher degree of volatility of returns and can cause reputational concerns." For London, at least, the long-term protection of its reputation as a financial centre is likely to take precedence over the current lull in IPO activity. Link this Share this Digg this Email Reprints

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