MTU Aero Engines Prices with sensitivity

The €650m IPO of Germany’s MTU Aero Engines closed on Friday, June 4, many times oversubscribed. The book was 10 times covered but with a fair degree of sensitivity. Private equity owner KKR had set a valuation of up to €1.2bn on the company prior to marketing. Deutsche Bank, Goldman Sachs and UBS were joint bookrunners for the offer.

The 31m-share offer was marketed within a €19–€22 price range, with sensitivity thought to point towards pricing in the middle of that range. In the end, subscription levels were such that the offer could have been priced at the top of the range. Nevertheless, the leads settled for €21, where the book was seven times covered. Pricing at this level left some room to trade up and kept the pricing at a discount to comparable Rolls-Royce.

The company issued 15m shares to raise €315m for ongoing development, while KKR sold a further 16m shares for €336m. KKR has also provided 4.65m shares as a 15% greenshoe that could raise a further €97.65m. Approximately 17% of the offer went to retail, although this could have been significantly higher. The decision was taken to keep retail at this level as institutional orders would have been cut severely if more had gone to retail.

The offer benefited from marketing in a narrow range as this provided clear direction on valuation. Bankers say it was a logical move considering the company is mature and has a direct comparable in Roll-Royce. Following the offer, KKR will hold 29%, if the greenshoe is exercised, and management 6%. Both are subject to a six-month lock-up. The syndicate was completed by co-lead managers Cazenove, Commerzbank and HVB, with co-managers BNP Paribas and Sal Oppenheim & Cie.

MTU operates three lines of business, covering military and commercial engines and servicing. Revenues in the first quarter of this year were up 18.5% to €510m, from €430m for the same period in 2004. The IPO came just 18 months after KKR acquired the business from DaimlerChrysler. In March last year, the company added €35m to its €240m 10-year, non-call five senior notes, which were sold to finance the LBO, alongside €620m in senior debt.