London investors should pay more attention to company fundamentals when judging whether to put money into new offerings, WE Soda Ltd. Chief Executive Officer Alasdair Warren said, after pulling a planned listing that was set to become the City’s largest so far this year.
(Bloomberg) — London investors should pay more attention to company fundamentals when judging whether to put money into new offerings, WE Soda Ltd. Chief Executive Officer Alasdair Warren said, after pulling a planned listing that was set to become the City’s largest so far this year.
“IPOs are fundamental to sustaining capital markets, you know, bringing new companies and new ideas to the market,” Warren said in an interview with Bloomberg radio. Investors have “really got to question whether their current approach is the right approach, because otherwise I think a lot of companies will be turned off and go to private equity or private capital formation as an alternative.”
WE Soda walking away from listing in London shows it’s not just tech companies that are struggling to carve a future in the UK market. Traditional resource companies are also facing a battle to win backing from local investors.
Warren said he was frustrated because he believed the company had all the right credentials, including “best in class sustainability credentials”. “So if this doesn’t work, what does work?”
The company was seeking a $7.5 billion valuation, Bloomberg News has reported, but couldn’t get investors to agree to it, dashing London’s hopes of recovering from a severe slump in listings.
“Whilst we were prepared to accept the normal valuation discount that you get in IPOs, where investors got to was such an extreme position that we just took a view that the valuation just didn’t make sense for us,” Warren said in a separate interview with Bloomberg TV. “Given that we didn’t need the money, we decided to pull the IPO.”
The company would have probably met with “a broadly similar outcome” across Europe, where IPO activity has been at a near standstill for months, Warren said, adding that the market needs “a group of investors that are prepared to look at a company on its strengths.”
In the US, on the other hand, “there’s a far broader pool of investors,” he said. “People tend to have higher levels of conviction to back themselves as opposed to following others.”
WE Soda is now focused on expanding in the US, and while that market wasn’t a suitable location for the company right now, it may be in the future, Warren said, adding that he wasn’t ruling out another attempt in London.
Warren was previously Deutsche Bank AG’s head of corporate and investment banking for Europe, the Middle East and Africa.
Valuation Gap
While a valuation gap between buyers and sellers, combined with persistent inflation, high interest rates and volatile markets, has scuttled many global IPOs this year, London in particular has struggled to prove its mettle to new firms and existing ones eyeing deeper valuations across the Atlantic.
That debate was sparked by Cambridge-based technology company Arm Ltd.’s decision to list in New York, rather than its home market of London, and worsened by the likes of building materials firm CRH Plc and gambling company Flutter Entertainment Plc pursuing US listings to lift valuations.
“WE Soda’s U-turn is certain to reignite discussions about London’s future as a global financial powerhouse,” said Danni Hewson, head of financial analysis at AJ Bell. “And the huge publicity is a blow to London markets, which have been battling to win over hearts and minds post-Brexit.”
“On the face of it, the fact that a listing of this kind, which is typically London’s bread and butter, hasn’t been successful is of huge cause for concern,” she said. “But there are other issues to consider, not least the rather hefty valuation WE Soda had in mind.”
Listing Rules
The UK has responded to the dearth of activity by making a wide swathe of changes to its listing rules. The Financial Conduct Authority has proposed a number of changes to make UK listings less complicated and onerous, including making it easier for companies to have two classes of shares, which is favored by some entrepreneurs who want to keep control of their businesses.
WE Soda’s listing decision was also helped in part by rule changes in London allowing companies to reduce the free float, that is the proportion of shares available to the public for trading, to 10% from 25%, given its large size, its executives have said. Still, easier listing rules alone weren’t enough.
“The combination of an unfamiliar commodity, some geographic risk and lots of capex investment may have left many potential investors expecting a cheaper valuation than hoped, particularly given the prevalence of very cheap shares throughout the UK market,” David Kneale, head of UK equities at Mirabaud Asset Management, said in an email.
WE Soda, backed by Turkish industrial conglomerate Ciner Group, is one of the lowest-cost producers of a key material that’s used in glassmaking and in electric car batteries. Ciner Group operates the BloombergHT television channel in Turkey under a deal with Bloomberg LP, the parent of Bloomberg News.
Just about $600 million has been raised via IPOs in London so far this year, according to data compiled by Bloomberg, putting the market on track for its worst showing in years.
CAB Payments
There’s some hope for the London market still. Transaction processor CAB Payments Holdings Ltd. on Thursday confirmed it plans to pursue an IPO in London, albeit at a much smaller valuation target than WE Soda.
CAB Payments could be valued at £800 million ($1 billion) to more than £1 billion in the IPO, Bloomberg News reported.
And not everyone has written off the UK. “People love to read into these sorts of stories, but London has shown great strength and resilience in the past, and will continue to do so,” said Andrew Collins, partner at law firm Charles Russell Speechlys.
–With assistance from Ruth David, Michael Msika and Lisa Pham.
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