The failure of the original Hogg Robinson Group (HRG) IPO was largely seen as self-inflicted, after private equity sponsor Permira introduced the competitive IPO process that typically leads to banks overpromising on valuation. Despite the clear message from the market during bookbuilding, little effort was made to restructure the offer, which was pulled then revived at a radically different valuation last week.
The original attempt had seen the company try to raise £190m alongside some selling by Permira to achieve a free-float of approximately 75%. The price range was 140p–220p, indicating a market capitalisation of £338m– £401m. That range kept the issuer happy but appeared to take little notice of institutional feedback from pilot fishing and pre-marketing, leading to the deal being pulled, although investors said HRG had been hawked around at a lower level than 140p before the original cancellation.
When it was revived last Thursday morning it had a significantly lower valuation. The company still required funds for growth so was seeking £180m alongside selling by Permira to give a total deal size of £220m. The price range was set at a significantly reduced range of 90p–120p, but only the bottom end of this range was relevant.
The changed price range marked a dramatic move in terms of valuation. On a P/E basis for 2007 the original range valued the company at 12.1x–15.1x, while the revised range saw this fall to below 10x, a move that worried some investors.
“The company obviously needs the money but Permira seems unwilling to provide it. We were previously being asked to buy in the mid-teens; now it is sub-10x,” one top account said. “Now it looks so cheap the numbers must be wrong, or why are they selling?”
Despite such suspicions, and some accounts being turned off by a process designed to force orders into the book, there was strong momentum this time. The deal was therefore able to be priced at 90p on Friday night, many times covered.
Final pricing gave a market capitalisation of £275m, a 25% reduction compared with the middle of the previous range. Allocations went out on Friday night with a significant bias to those accounts in the book when the deal launched. This boosted oversubscription in the rest of the book and should lead to positive trading on Monday.
The original deal saw Citigroup, Credit Suisse, Lehman Brothers and Merrill Lynch as joint bookrunners, and Lazard as process bank.
Coincidentally, Citigroup, Merrill Lynch and Lazard are all also working on the planned UK government sale of a stake in British Energy. With UK ECM bankers working on both deals it was little surprise that a BE meeting held shortly after HRG had been cancelled saw bankers from the three houses discussing the latter deal.
An accelerated solution was suggested and agreed with Permira, and the leads began sounding out accounts. The company held one-on-ones and conference calls on Thursday with investors, while all the paperwork for the issue was hurriedly arranged.
All four banks retained bookrunner positions, though for Credit Suisse and Lehman Brothers in name only. Citigroup and Merrill Lynch were the only banks involved in building the book on Thursday and Friday and the economics were revised to reflect this. The move to have two active bookrunners was made to make the process of building an IPO book more manageable in such a short period. By mid-morning the deal was rumoured to be almost twice covered and multiple times done at 90p by the end of the day.
The revised pricing was not just attractive on a forward looking basis as the cut in price pushed the dividend yield up to 6.3%. The dividend move was important as some accounts were not comfortable with the leads’ P/E multiples. HRG benefits from a low tax charge, however some accounts view this a concern, given that if the UK Exchequer changed the rules that could change. Adjusting the tax rate saw the P/E multiple at the bottom of the original range jump from 12x to around 16x, according to one banker away from the deal.
Bankers close to the deal said that the relatively small size of Permira’s investment in HRG meant it was more willing to move on valuation than it might be on larger deals. Therefore, the price drop was simply recognising the private equity firm’s desire to exit now having gone through the whole IPO process, rather than anything more sinister.
But away from the deal bankers questioned whether Permira would now move away from the competitive process, which some speculated had cost the firm dearly. Some accounts last week suggested that if 140p had been the middle of the original range rather than the bottom, they would have considered participating, but the “arrogance” of the initial structure was enough to keep them away.
When the number of live IPOs is close to 30 in Europe, deals must be realistically priced to gain momentum and stand out from the crowd. Had HRG offered a yield of 6% in the first place, this might have been sufficient to create that momentum. As it was, the final solution can be of little genuine satisfaction to any of the parties involved.