With renewed appetite for European IPOs, UBS's business service team has a busy pipeline of deals. It started the year well, with a mandate from ISS, which has a history of aborted sales, but which UBS secured a solid buyer base for.

The initial public offering (IPO) is back, particularly for financial sponsors, and the March listing of facility services company ISS in Copenhagen was one of Europe’s largest for some time. What had stuck in most investors’ minds, however, was the company’s history of aborted sales. UBS helped to tell them a different story.

European equity markets have been stirring since the second half of 2013, as the general perception takes hold that the crisis is over. That is particularly true of US investors, who have been funnelling more money into European equities as the macroeconomic backdrop continues to improve. One result is that private equity has rediscovered the IPO as an exit, not least in the business services sector.

“In the service sector we typically see one IPO a year in Europe,” says Jean-Baptiste Petard, UBS’s head of business services, Europe, the Middle East and Africa. “This year we already have three which have either floated or announced their intention to do so.”

One is ISS. Another is materials testing specialist Exova, which was due to float in April. As the first Scottish firm to list on London’s main market for two years, its owner was the private equity firm Clayton, Dubilier & Rice. Another is Spanish certification company Applus, whose owner, Carlyle, opted for a Madrid IPO.

Float or sink?

While equities generally have been doing well, IPOs have a special attraction. They present an opportunity to deploy relatively large amounts of capital in one go, in a way that is much more difficult in the secondary market. 

“Private equity owners are finding that IPOs are currently more attractive from a valuation perspective,” says Mr Petard, who has covered business services for most of his 15 years with UBS. The sector has seen a lot of private equity activity because they are drawn by its inherent nature – often capital-light, resilient through the economic cycle, with attractive cash flows.

Denmark’s ISS is one of the most prominent players, with more than 530,000 employees in more than 50 countries, providing cleaning, property, catering, security and facility management services. EQT Partners, the buy-out arm of Sweden’s Wallenberg family, and Goldman Sachs Capital Partners paid DKr21.9bn ($4.04bn) for the business in 2005. In 2007, the onset of the credit crunch forced them to abandon its planned flotation. In 2010, talks over a sale to Apax Partners collapsed. In 2011, the owners were forced to pull another IPO and then to scrap a sale to G4S, one of the firm’s biggest competitors, when the would-be buyer’s shareholders objected.

In 2012, a 26% stake in ISS was sold to Ontario Teachers’ Pension Plan and Kirkbi, the investment vehicle for Denmark’s Kirk Kristiansen family, which controls toy company Lego. Between them they paid DKr3.7bn, or DKr105 a share. Both are known as long-term investors that would stay on post-IPO, and their fresh equity capital helped to reduce leverage from levels that would be undesirable in a public company.

Setting the story straight

As equity markets started to loosen up after mid-2013, UBS received a mandate as joint global coordinator with Goldman Sachs and Nordea for an IPO. The bank had not been involved in the previous two attempts, which probably counted for something. And it has the top-rated support and business services analyst William Vanderpump, which can have done no harm.

ISS had a lot going for it, but there were also a few challenges. On the plus side, it is a very large company and this would be the biggest IPO in its sector since 1998, so it was always going to catch the attention of investors. Its business model was relatively straightforward and easy to understand, and outsourcing is looked on favourably as a business.

“ISS also has an experienced management team,” says Mr Petard. “The company was very well prepared, and deployed a lot of management resources to ensure the success of the IPO.”

The big challenge was, of course, the company’s serial failure to consummate a sale of any kind. “There is potential for some scepticism when you’re going again,” Mr Petard says. “So there was a big emphasis on making sure that everything went by the book.”

The business itself had changed a lot since it had been a public company, before slipping from public view. “You are often known for what people remember of you, not always for what you are today,” says Mr Petard. “For instance, while ISS had been very acquisitive historically, it had focused on high-quality organic growth for the past few years, which appealed to investors.”

It now concentrates on integrated facilities management, where clients contract for a suite of different services. It handles a lot of global contracts and has also grown in the Americas and Asia. It had also disposed of a number of businesses, such as pest control and damage control, and the bankers needed to re-educate the investor.

“The emphasis in our work was to craft the equity story, and to position the company with investors,” says Mr Petard. “The joint global coordinators were very quick to engage with them, so that they knew it was coming. That was important to ensure the story was well understood.”

The long run

It was important that ISS, after more than 100 years as a Danish company, was listed in Copenhagen. Work began on the prospectus and the presentation that analysts would make to prospective investors. There was some uncertainty about the type of reception there would be for a company that had been here before and did not deliver. Would investors re-engage?

The reality was that they did. ISS was seen as a resilient business, one that had remained positive in the trough of the business cycle, and 70% of its operations remained in Europe. Investors expected a recovery in Europe and this was a sizeable opportunity for exposure to it.

However, the price was going to be crucial. From early on, the bankers had a level of engagement from investors, but they could not afford yet another failure, and the price range reflected that. Taking into account benchmarks such as Sodexo – particularly relevant, with a similar integrated services strategy – and single service peers such as Securitas and G4S, the range was set at DKr140 to DKr175. “The low end was appealing to shareholders, and the upper end was a more fundamentally driven valuation, where the stock should trade post-IPO,” says Mr Petard.

The shares were finally priced at DKr160. Jasper Tans, co-head of equity capital markets at UBS, says a theme ­is emerging from recent sponsor-related IPOs. “There had been a bit of an aftertaste with private equity transactions taking nearly all the money off the table,” he says. “But today, many firms are conscious of the need to uphold their reputations as ongoing participants in markets by doing good deals for themselves and for the buyer base.”

With ISS, he says, it was clear from the beginning that management and the owners had two important objectives. They wanted a successful deal, but they also wanted to build a strong share register and a foundation for any subsequent reduction in ownership.

Investors were taken with the story, and the conservative pricing drew them in. Some 650 accounts put in orders and the book, Mr Tans says, was many times covered. “Everybody was buying,” he reports. “We had sovereign wealth funds at the top of the book, and the Danish market was very supportive. It was one of the best quality books I have seen for a long time.”

The Danish retail market got 10% of the allocation, and the Nordic countries, the UK and the US were the three big institutional pillars. Some weeks later the shares were trading at about DKr180.

“It showed there is a huge appetite for high-quality IPO candidates with a strong story, which are scarce opportunities,” says Mr Petard. “More specifically, it was a large first in a series of service companies coming to market this year."


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