Growing up in public

There is one thing stronger than all the armies in the world; and that is an idea whose time has come.” This rallying cry was fitting in March 2000 when booming equities markets and wholesale market restructuring created Elysian conditions for European IPOs. Within weeks, the Internet bubble had burst and the best of times had turned into the worst. The subsequent stagnation of stock markets and a slump in M&A activity makes for a sober analysis of the first two years in the life of Euronext.

Euronext saw its official inauguration in September 2000 when Jean-Francois Theodore, its then chairman declared it “the first attempt to take advantage of the immense potential of European financial market opened by the implementation of the single European currency.” The merger of three national stock exchanges Amsterdam, Brussels and Paris was the first step in widening the pool of liquidity for would-be market entrants. Since then, Euronext has acquired Liffe, the London futures and options exchange, and moved its platform to London and has outlined its intention to outbid rivals in the ongoing battle for the London Stock Exchange.

Growth potential?

According to PricewaterhouseCooper’s IPO Watch Europe, which tracks flotation activity on Europe’s principal stock markets, there were 11 IPOs on Euronext Paris between January and April 2002, up 38 per cent over the same period 12 months ago. By contrast, flotation activity on the Deutsche Brse registered a decline of 78 per cent, down to two IPOs from nine, while the LSE hosted 19 flotations, a fall of 46 per cent.

But these positive statistics, supporting the Euronext motto, go for growth, should be underwritten with caution when regarding the suitability of the new exchange as an exit route for French VC investors. Firstly, the PwC survey divides Euronext into its three geographic jurisdictions, rather than viewing Paris, Brussels and Amsterdam as a whole. This is fitting because Euronext Paris, with a total IPO value of EURO2.529 billion, accounted for all activity across the three centres. Thus Tom Troubridge, partner at PwC and head of the firm’s London capital markets group, hesitates to call the success of Paris as evidence of the success of the Euronext concept: “Euronext Paris is probably successful because the French economy is doing rather better than the German economy. Also, investor protection for retail investors is rather better than the investor protection on the Neuer Markt.”

Secondly, Paris has benefited from chunky issues from large corporates. The EURO2.477 billion flotation of Autoroutes du Sud de la France (ASF), the French motorway toll operator, was Europe’s largest for the quarter, an honour which France also claimed last year with the dual London-Paris EURO4.5 billion listing of Orange, and the Credit Agricole flotation. So, for blue chip national companies, Euronext has proved a success in France. But with issuance thin, and fund managers in defensive mode, the chances of these big ticket deals spreading to mid-market investments the staple of many French VC investors cannot be quantified.

Mark Foulds, a director of Bridgepoint Capital in Paris says the firm has not exited via flotation for some years: “France has never had the best exit market anyway, but also because of the current climate. Certainly we welcome the arrival of Euronext because anything which increases liquidity is good for investors. But whether it will benefit the private equity community is another issue. This is because VC type deals may not have the sufficient critical mass to attract institutional investors.”

This is a perennial problem for small and mid-cap IPO candidates and not one that can be laid at the door of Euronext. Towards the end of the 20th century, fund managers clamoured for growth stocks, but small-cap success stories were part of the technology boom, while old economy corporates felt undervalued and the PTP market provided an entry for VC investors looking to buy and build. The vision of a pan-European pool of liquidity is a brave one, as is one which allows companies of different sizes to flourish, but Euronext has had the misfortune of coming into the world at a time when equities have apparently had their best days behind them. Foulds agrees: “The last few years the market has been distorted so it’s not the best period to look at. But I think companies below a size of EURO800 million (Ffr5 billion) will struggle to get interest from investors and get analysts to follow them. We had a couple of attempts with businesses valued at Ffr1.5 billion (EURO250 million) and we ended up pulling the plug reasonably far down the process. Now people are scouting around to find good quality undervalued opportunities. I suspect the market is a bit more favourable, although we have not tried [to exit via IPO] recently.”

Foulds’ view about the difficulties facing companies below the large cap radar is borne out by recent events. On April 5, Alain Afflelou, in which Apax Partners holds a 39 per cent stake, announced that it was halving its offer to EURO66.2 million from the original EURO132 million. Credit Lyonnais, the bookrunner on the deal declared that the shares would be priced at between EURO15 and EURO17, lower than the original target range of EURO17.25 to EURO19.25.

There are a number of listed mid-caps suffering from a lack of liquidity. Aigle, France’s leading company in the outdoor clothing market, is listed on the second marche. It went public in 1994. Apax is a majority shareholder and in more propitious conditions would be seeking an exit. But trading volumes are thin so any attempt by the VC to sell shares would see the price move against them.

In the absence of sweeping pension fund reform based on the anglo-saxon model, Euronext will probably struggle to match the liquidity levels of its London or New York competitors. But a more fair summation of the new exchange’s strengths will be possible when the IPO market returns. In the UK, there are a number of old economy VC exits heading to market, but this is not being replicated in France.

There are also a number of technical issues which must be resolved. Firstly, there is no single regulatory rule book in place to reflect Euronext’s ambition to be a single trading platform. Troubridge says there is another reason apart from the dominance of the French economy which leads PwC to separate the three exchanges: “Although Euronext is marketing itself as one market, the three regulatory departments are still quite different. The French rules are different to the Dutch rules or the Belgian rules. I think until we see greater convergence of regulation generally in Europe we will continue to treat them as different markets.”

There are a number of initiatives aimed at driving convergence. Later in May the FSA will publish a report on comparative primary market regulation worldwide, which will serve as a forerunner to a review of the LSE’s listing rules. Then there is the Prospectuses directive, which the EU is attempting to ratify in order to create a single regulatory market. This has met with considerable opposition from the UK, because the directive could harm London’s status as the pre-eminent financial centre. Finally there is the move towards international accounting standards (IAS).

By 2005, all listed companies in Europe will have to have IAS accounts. In Q1, only 9 per cent of new offerings had IAS accounts. The divergence of accounting standards does not help Euronext’s cause. Troubridge comments: “French IPOs are predominantly done using French accounting standards and this brings me back to the international theme. Investors are generally wary of investing in companies where they do not understand the accounting. I think UK Gaap is better understood than French Gaap.”

Once these points are addressed, Euronext will be home to a more transparent, user-friendly regime. Troubridge adds: “What Euronext is to have created a number of different markets primary marche, second marche, nouveau marche and the marche libre. After London, that has attracted the next biggest number of IPOs. I don’t think we will see Euronext attracting overseas IPOs in the same way that London does. I think that Euronext has a way to go.”

In truth, Euronext’s mettle has not been tested from a private equity perspective. This will happen when global equity markets are attractive enough to draw medium-sized issuers into the fold. Their current benign nature means that IPOs are not a good exit option in any market, let alone France. Yet the healthy pipeline of UK issues over the next quarter could provide the example which other markets will follow. For the moment, Euronext remains a great idea whose time has not quite come.