European IPO Market Frozen, as Investors Demand Deep Discounts

LONDON (Reuters) – Poland’s possible retreat from floating power group Enea shows how tough the market equity capital has become. Bankers say IPO hopefuls would need a huge discount to attract investors in the current market.

After finishing premarketing for what could be Poland’s biggest initial public offering (IPO) last month, Deputy Treasury Minister Joanna Schmid on Wednesday told Reuters Poland might drop the $1.2 billion share sale plan and turn to a strategic investor amid difficult market conditions.

“Many investors have suffered significant redemptions in assets under management. So it’s difficult to have their attention on IPOs,” said a London-based equity capital market banker who is involved in recent new offerings.

According to the European funds association, total net assets under management dropped 8 percent in the first half of 2008 to 7.3 trillion euros, and market watchers expect the decline has accelerated since June.

“It makes more sense for issuers to turn to strategic investors or wait for better timing. Of course, they can also get the deal done if they give their shares away,” said another equity capital market banker in London.

Renewable energy firm Schott Solar, which pulled its 500 million euro flotation after four weeks of premarketing amid the Lehman Brothers collapse, revived its deal at around a 40 percent discount to peers. The deal is closing Wednesday.

As global stock markets face the worst financial crisis in nearly 80 years, investors are expecting new issue discounts of around 30 percent to 40 percent.

“I think the current market conditions globally are shut for any IPO activity,” said Martin Majdaniuk, manager of the Baring Global Umbrella Eastern Europe Fund.

Even Germany has raised questions over the timing of the planned partial privatization of its rail operator Deutsche Bahn Mobility Logistics (DBML) DBN.UL.

Deutsche Bahn executives will meet with the government steering committee on Thursday to discuss the price range of the 4 billion to 6 billion euros offering, the country’s biggest in eight years, before kicking off bookbuilding on October 13.

Although DBML keeps saying there had been no negative signs from the market, German Finance Minister Peer Steinbrueck earlier this week questioned the timing of the launch.

“It will be very difficult,” said a source at the syndicate.

DBML, which is selling 24.9 percent of its share capital, initially aimed to raise as much as 8 billion euros. That represents roughly 9.7 times 2009 EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization).

But as shares of peers have dropped about 15 to 20 percent since premarketing started last Monday, analysts are lowering valuation talk to 5 to 6 times EV/EBITDA.

A spokesman for a large fund manager said he believed the DBML deal, arranged by Deutsche Bank (DBKGn.DE), Goldman Sachs (GS.N), Morgan Stanley (MS.N) and UBS (UBSN.VX), would get done.

“The question is — at what price?”

By Daisy Ku
(Additional reporting by James Molony and Cecilia Valente; Editing by Richard Hubbard)