Market Volatility IPO Pipeline Intact — For Now

Bankers expect German public share sales, like Bayer’s plastics operations, to go ahead despite the latest market turmoil. But if markets keep tanking, all bets are off, especially for cyclical companies.
Work at Bayer's chemicals unit Covestro continues, IPO or not.

Big stock market flotations are like supertankers – rough seas don’t throw them off course. Take First Data, the U.S. payments processor, bought by private equity firm KKR eight years ago for close to $30 billion. Despite the current roller coaster on global markets, the company went ahead this week with preparations for its initial public offering by announcing the banks that will manage the sale planned for this year.

The flotation is being closely watched in Germany, where it’s seen as a bellwether for a number of German IPO candidates. These include the plastics and adhesive division of pharmaceutical giant Bayer, which will be renamed Covestro and whose flotation is expected to raise at least €2.5 billion, or $2.85 billion. Preparations are still underway regardless of the shock caused by the tumbling Chinese market.

Most IPOs are usually done in September or October so we don’t yet see any direct impact on preparations yet. Stefan Weiner, Head of equity capital markets in Germany, JP Morgan

Analysts said they don’t expect scheduled IPOs to be cancelled in Germany at this stage.

“With big IPOs where preparations are well underway, people are sticking to the existing timetable at the moment,” said Christian Gärtner, head of German equity capital markets at Bank of America Merrill Lynch.

But when it comes to IPOs that are still at an early planning stage, a postponement until next year was being discussed in some cases, he added.

“Most IPOs are usually done in September or October so we don’t yet see any direct impact on preparations yet,” said Stefan Weiner, the head of equity capital markets in Germany for JP Morgan. “We think there should still be several successful listings by the end of the year.”

In the first half of 2015 there were 91 IPOs in Europe with a total volume of some €33 billion. Germany lagged behind with just eight IPOs in the so-called “Prime Standard” segment of the Frankfurt Stock Exchange, where companies are subject to the highest level of disclosure. They totaled €3.1 billion, of which the listing of German property and public investment lender Deutsche Pfandbriefbank accounted for €1.1 billion alone.

Among the big IPO candidates, real estate firms in the pipeline are seen as a relatively safe haven. That’s why property developer Aurelis and residential property group BGP have good chances of being listed on schedule, said market watchers.

But export-oriented companies might shelve their listings if bad news keeps pouring in from China. That applies to Hapag-Lloyd, Germany’s biggest container shipping line and the world’s fourth-largest, which is planning an IPO in the coming months.

German search engine Scout24, meanwhile, with an issue volume of up to €1 billion, is regarded as less cyclical.

The final decision on whether to go ahead with the IPOs will hinge on how volatile the stock market will be in the coming weeks and month.

The DAX Volatility Index (VDAX), which is calculated using DAX options and indicates the expected volatility of the index of top 30 German blue chip shares for the next 30 days, normally lies between 10 and 15 percent. At the moment it’s far higher at around 33 percent, which could prove an obstacle to IPOs if it doesn’t fall.

“The increased volatility of course makes it harder to arrive at a price for the flotation. In addition, one is totally exposed to market risk during the public offer period,” said Alexander Rang, a capital markets lawyer at the law firm Hengeler Mueller.

At present, important market players are still on vacation, and the resulting thinner trading volumes are exacerbating market swings.

Klaus Fröhlich, head of equity markets for Germany and Austria at Morgan Stanley, predicted that there would be a further five to seven IPOs in Germany this year.

“The share price losses are exaggerated and stem partly from the holiday-related absence of many investors,” he said. There had been little change in fundamentals in the last few weeks and the market was likely “oversold.”

Bayer and Hapag-Lloyd will be hoping that he’s right.


Peter Köhler heads Handelsblatt's banking team in Frankfurt. Robert Landgraf is the deputy head of Handelsblatt's finance section and is based in Frankfurt. To contact the authors: [email protected] and [email protected]