French electrical company Legrand last Friday celebrated its return to the public markets after almost four years with a first-day rise of 18% from its IPO price, and a deal that was around 30x oversubscribed.
In the base deal, the company sold 43.7m primary shares at €19.75, the top of its €17.00–€19.75 price range, raising €863m and giving it an equity value of €5.4bn. Bookrunners were BNP Paribas, JPMorgan, Lehman Brothers and Morgan Stanley.
The deal has had huge positive momentum almost since it was first mooted. Not only is the investment community still familiar with the company from before it was bought out by a group of private equity firms led by Wendel Investissement and KKR, but it offers the only listed pure play on low voltage electricals.
Management, led by chairman and CEO Gilles Schnepp, is also held in very high regard by investors and is seen to have spent the time away from the public market very profitably – by improving efficiency and increasing exposure to high-growth markets.
As well as the base deal, Legrand issued 33.9m primary shares to GP Financiere New Sub 1 SCS, a vehicle that holds Legrand PIK loans made by the existing shareholders. In addition, up to 5.5m shares will be issued to employees and there is a greenshoe of 6.55m shares.
Wendel and KKR were not selling in the deal, but allowed themselves to be diluted from around 75% to 60%. The free-float is just 20%, which could have been small enough to create a problem had investors not been convinced by the quality of the asset.
That concern is thought to have been behind the inclusion of an increase option of a further 6.5m primary shares. This was not exercised, in spite of the level of demand, but bankers said that it could have been used to boost the free-float if necessary.
At the offer price, the company was valued at a 2006 EV/Ebit multiple of 12.3, a premium of around 10% to Schneider, the principal comparable.
One significant aspect of the deal relates to a last-minute change in the fee structure, and this means that at least one potential element of controversy has been avoided. When the IPO was being prepared, the proposition was for the 2% incentive fee to be linked explicitly to the valuation that was achieved by the bookrunners.
That proposal – thought to have involved a linear scale from no fee if the valuation was equivalent to a 2005 EV/Ebitda multiple of 9.5 or below, to a full fee if the multiple was 11 or above – had attracted considerable comment elsewhere in the market.
While most bankers are resigned to the fact that incentive fees will gradually outweigh base fees on IPOs (the base fee on Legrand is just 1%, while the incentive is 2%), they argue that the potential for irresponsible pricing is too great if payment is directly linked to specific valuation figures.
But at a late stage in the Legrand deal, and after the original fee structure had been disclosed in at least one syndicate briefing, the idea was dropped.
“The linkage of fees and valuation was discussed with the syndicate originally, but in the end it was decided that this connection would not be made,” said one senior banker close to the deal. “This was in order to avoid any criticism of the structure after the deal.”
In the event, the huge level of demand and the very strong trading performance in the aftermarket led some observers to criticise the deal for not being aggressive enough, though this was dismissed by those close to the company.
“It has obviously been a huge success but I would argue that if you are Wendel or KKR now you are pretty unhappy,” said one banker, blessed with the benefit of hindsight. “The range was only set 10 days ago and they should have been able to get more.”