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THE EURO'S WARM-UP ACT: IPOs (int'l edition)Stock issues become the hottest way to finance expansions
Cologne-based Interseroh has a dream: to become a kingpin of European trash. Germany's biggest paper and metal recycler, with some $300 million in annual sales, just bought out a French rival. Now, it's raising $70 million in its first public stock issue to finance other acquisitions across the Continent. ''With the single currency coming, we see opportunities,'' declares Andreas Schmidt, a member of Interseroh's board.
It's boom time for new share issues in Europe, and trash recyclers aren't the only ones ripe to do deals. Companies big and small need cash to finance the cross-border expansion that will give them a more global reach and to gain an edge when Europe adopts its single currency. And since Europe's stock markets today are the hottest in the world, unprecedented numbers of companies are looking to them for capital rather than taking out old-fashioned bank loans.
BUMPER CROP. New issues have surged in recent weeks (table), and massive deals are scheduled for the summer and fall. After an aggressive marketing campaign, Spain's $8.6 billion sell-off of 33% of giant utility Endesa on June 9 was three times oversubscribed. Future issues include Italy's $6.8 billion sale of a 12% stake in oil and gas conglomerate ENI. At this rate, new share offerings in Europe in 1998 could exceed last year's $91 billion.
The trend represents a revolution in European corporate finance. Structural changes in Europe's economies are fueling the rush to market. Thanks to the creation of the 11-nation euro zone, the Continent's anemic equity markets are expanding and becoming more trans-European. Small-company markets have sprung up, such as Germany's Neuer Markt, up 137% since January. At the same time, deregulation and an explosion of cross-border mergers are forcing companies to raise acquisition war chests to gain the critical mass they need to compete.
Now, stock market financing is breaking companies' traditional reliance on banks for capital. The soaring equity markets--plus intense interest in stocks by European investors worried about funding their retirements--is giving growth companies an alternative way to fund rapid expansion. The new stock issues also reflect a new confidence among Continental managers that they can deliver the returns that stockholders demand. ''We see this as an accelerating trend,'' says Dante Roscini, a London-based managing director with Goldman Sachs International.
Corporate restructuring is driving many of the biggest deals. So far this year, Capital Data Ltd., a London database, figures 53% of the $31 billion worth of new share issues have been corporate, as opposed to privatizations. As companies restructure, spin-offs are proliferating. For instance, French telecom-equipment giant Alcatel is focusing on new, high-margin businesses--most recently through its $4.4 billion bid for Texas-based DSC Communications Corp. To raise cash and unload a noncore holding, Alcatel plans on June 20 to float a big chunk of its stake in GEC Alsthom, its heavy engineering joint venture, in an issue expected to raise some $1.9 billion. Similarly, Sweden's Investor plans on June 18 to raise $279 million by selling to shareholders a stake in Saab, its marginally profitable defense and aerospace arm.
As Europe's financial markets grow in sophistication, companies have more options. For instance, two years ago, when Siemens spun off its Rofin-Sinar Technologies Inc. laser unit, notes Rofin-Sinar CEO Peter Wirth, ''we didn't have any other choice, so we listed in the U.S. on NASDAQ.'' Now, with the plethora of newly created exchanges, most companies list in Europe.
Meanwhile, family-run companies in Germany, France, and Italy are finding that going public allows them to raise needed capital without coming under the thumb of a big bank or corporate parent. Listings on Germany's Neuer Markt have doubled, to 30, since Jan. 1. In Italy, $95 million lawn- and garden-equipment maker Emak is planning to float 29% of its shares on the Milan Borsa in mid-June. It wants to expand outside Italy and build a new factory capable of producing 200,000 lawn mowers a year. ''We prefer not to sell a chunk of our company to a single partner who might exert influence on a managerial level,'' says Emak CEO Ariello Bartoli.
In many cases, U.S.-style leveraged buyout firms and other financial specialists--deeply mistrusted on the Continent until recently--play a key role in the new financing wave. On May 11, Germany's Winkler & Dunnebier, a leading producer of machines to make envelopes and hygiene products, raised $242 million as part of a buyout by London LBO giant Doughty Hanson. Banco Santander, Royal Bank of Scotland, and London buyout firm Charterhouse PLC were among the shareholders that helped engineer a recent $299 million share issue by Spanish supermarket chain Superdiplo.
Deregulation is another driving force behind the frenzy of new issues, especially in telecommunications. The trend started in Britain, where companies such as Colt Telecom Group PLC have been red-hot performers over the last four years. Colt, a local carrier that has been setting up fiber-optic networks in European cities, did a $135 million-share issue in 1996. Already operating in four countries, Colt plans to use the cash to expand its service in four more markets by the end of 1998. Entrepreneurs in once staid markets such as France and Germany are rushing to cash in, too. Shares of Cologne alternative phone company Drillisch are up 307% since it listed on the Neuer Markt on Apr. 22.
TOO EARLY? Such spectacular stock performances are becoming more common in Europe. Shares of EM.TV & Merchandising, a Munich entertainment company that lures new investors with an elaborate Web site, are up 2,500% since the company went public in October. Given the ever present worry that Europe's thriving markets have to crack eventually, some experts fear that the rush to raise equity may be getting out of hand. ''The inevitable tendency in a bull market is to go to market too early,'' warns John E. Hyman, Morgan Stanley Dean Witter's new-issues expert in London.
One warning sign: Ionica Group PLC, a British telecom company that has had trouble getting its wireless phone network up and running, has seen its shares drop more than 90% from the offering price last July. But on the Continent, given the speed at which change is building, the best bet is that the rush to raise equity is still in its early stages.
By Thane Peterson in Frankfurt, with Kerry Capell in London and Monica Larner in Rome
Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.