After a dearth of initial public offerings in 2016, investor appetite is beginning to recover. Credit Suisse can attest to the market’s resurgence, having led several top European deals, including Société Générale’s flotation of its ALD car lease business. Edward Russell-Walling reports.

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If 2016 was a desert for initial public offerings (IPOs), this year has been altogether more fertile for such deals. With investors once again prepared to back new listings, Sociéte Générale was able to float ALD, its vehicle leasing and fleet management business, in a sector virtually unknown to European equity markets. Credit Suisse, number three in the year-to-date global, US and Europe, Middle East and Africa (EMEA) equity rankings, was joint global coordinator on the deal.

Last year was the worst for IPOs since the financial crisis, as more companies chose to stay private, private equity opted for more strategic sales and the UK's Brexit vote created uncertainty. But 2017 has seen a change in appetite, as investors start to think once more about growth, and global IPO activity to early September was 64% ahead of 2016, according to Thomson Reuters.

New appetite

The EMEA region’s first IPO of the year illustrated how far the mood had shifted. In February, Credit Suisse led the flotation of Detsky Mir, a Russian children’s goods retailer, which raised $356m for 33.5% of its business. “This was an emerging market stock in a consumer sector, and the offer was well oversubscribed,” says Stephane Gruffat, Credit Suisse’s head of EMEA equity syndicate.

Credit Suisse led another bellwether IPO the following month, for Neinor Homes, which sold 60% of its shares for €780m. “Neinor is a housebuilder in Spain, an industry which once was staring into the abyss,” says Jerome Renard, Credit Suisse’s head of equity capital markets for France and Iberia. “But the offer was upsized and the shares have done very well in the aftermarket.”

Two Swiss IPOs provided an even more telling measure of demand for new equity. In April, pharmacy and logistics business Galenica Sante raised nearly $1.9bn for 97.5% of its equity. And in July, Toshiba and others sold 100% of electricity meter manufacturer Landis & Gyr in an IPO, raising $2.4bn. Credit Suisse was a lead on both deals.

Mr Gruffat points out that it is rare for an IPO to include all or a substantial majority of a company’s shares. “But the issuers could do it because the demand volume was there,” he says. “The selling shareholders saw that the market valuation would trump any strategic sale or private equity solution. Right now, the market is very helpful for our product.”

This climate extends to financial institutions group (FIG) stocks too, now that UniCredit's €13bn capital increase in February and Deutsche Bank’s €8bn rights issue in March are out of the way. Credit Suisse itself launched a SFr4bn ($4.1bn) rights issue in April, rather than proceeding with an IPO of its Swiss bank.

Supportive environment

Mr Gruffat points to an interlocking triangle of positives for European FIG right now, embracing lower sovereign and political risk, banks’ renewed capital base and earnings power, and the overall strength of the equity market. Since Société Générale’s ALD is itself a FIG stock, at least on one level, this environment has been supportive for its listing.

ALD is the biggest business of its kind in Europe and number three globally, present in 41 countries and managing 1.4 million vehicles. There are a few other big players in Europe, such as Lease Plan and BNP Paribas's Arval, but none are listed. The only quoted European business in the vehicle leasing sector before ALD was the relatively small Sixt Leasing, with a strictly domestic German business and a market value of about €420m.

“One of the reasons for the IPO was to give more visibility to this very successful business,” says Julien Lamm, Credit Suisse's head of FIG for France and the Benelux region. It was also designed to accelerate development of new distribution channels and partnerships, as well as reinforcing ALD’s financial flexibility.

ALD has proved adept at creating and managing the partnerships required to achieve scale in this business, with other banks, original equipment manufacturers and car dealers. While the original client base comprised large multi-national companies that had been outsourcing more and more of their non-core activities, this is now being diversified. “ALD has successfully penetrated the small and medium-sized enterprise segment, where it is growing faster than its peers,” says Mr Lamm. “It also sees great potential in the retail market.”

Increased visibility

Raising its profile in the retail car leasing market, where it hopes to add 1 million vehicles over the next 10 years, was another reason for doing the ALD IPO. “What has made ALD more interesting for the market is the fact that it is positioned for certain long-term trends in society,” says Mr Renard. “One is a change in car ownership habits. Younger people no longer all want to own cars – they prefer someone else to own them, maintain them and eventually to take them back.”

ALD can point to a more than respectable record of growth over the past five years, with its fleet growing at a compound annual rate of 8.4%, gross operating income at 13.4% and net income at 22.9%. It describes itself as being at the “epicentre” of mobility services. As Mr Renard notes, the future of mobility is still evolving, which makes it harder to value ALD. It is difficult to know who will be the winners among the many existing and emerging players. “But someone still has to own the car, to maintain it and to have it on their balance sheet,” says Mr Renard. “And ALD has all these capabilities.”

Société Générale announced its plans to float ALD and sell a minority stake when it released its preliminary 2016 results in February. Credit Suisse had started work on the IPO, alongside Société Générale’s own investment banking team, “a few months” earlier. After the announcement, JPMorgan was mandated to join them as a joint global coordinator. By mid-May they were ready to begin the process of investor education, with three rounds of meetings – 54 in all – in Europe and the US before then. “That was more than usual, but we felt that investors needed time to get under the bonnet,” says Mr Renard.

There were also more different types of investor than usual. “ALD is a mixture of FIG and services,” says Mr Lamm. “The fact that it is unregulated with very high growth potential makes it appealing well beyond the usual FIG investor base.”

Regardless of why they were considering ALD, investors had certain concerns. Auto leasing outside Europe has had something of a mixed history, especially in North America. Some wanted reassurance on the residual value of the vehicles and how they were sold. Again, in North America residual value has been a negative driver rather than a positive, particularly in 2008. ALD was quick to point out it has no exposure to the US or Canada.

Good timing

Roadshows and the bookbuilding process ran for two weeks from the beginning of June. ALD fielded two management teams that met 210 institutions across Europe as well as in the UK and US. The timing was good. Emmanuel Macron had just been elected French president, a favourable result as far as financial markets were concerned, and this was the first French IPO of the Macron era. There had also been a flow of investment money from the US back into Europe in general. ALD acquired new operations in Spain and Ireland during this time, adding momentum to the deal.

The offer was priced shortly before the conclusion of France’s legislative elections, on June 15, at €14.30, raising €1.17bn for 20% of the business and valuing it at nearly €5.8bn. The shares were sold at the lower end of the €14.20 to €17.40 price range.

“Because of ALD’s complexity, order inflation was not in play,” says Mr Renard. “It was a balanced valuation, attractive enough for the parent company to sell. There was no hype in the deal – it was all fundamentals.”

There was an unusually high proportion of long-only investors, he adds. “To attract an investor base of this quality and size into a completely new sector shows that the market wants novelty which allows it to diversify. When they see a company at the forefront of natural economic evolution, the long-only investment community wants to be there,” says Mr Renard.

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