While these two are both exceptional in their own way, their success or failure could have a big influence on whether other investment firms or banks decide to offer up shares to the market this year.
Last year was a bumper year for IPOs and it has been a healthy 2014 so far as well. Whether this will continue is becoming increasingly uncertain with some proposed transactions, such as retailer Fat Face, being pulled recently due to lack of demand.
That failure is particularly noteworthy as the retail sector had been enjoying significant success with investors and dominating the UK IPO space. During the first quarter of 2014 eight successful retail company deals were executed for a total value of $4.1bn, according to EY.
Should River and Mercantile or TSB meet the same fate as Fat Face it wold be very questionable whether any other asset managers or banks would risk putting their heads above the parapet.
Fund managers and industry analysts can see plenty of reason to be sceptical about the River and Mercantile and TSB deals however, as well and the London IPO market in general.
Paul Mumford, manager of the Cavendish Opportunities, AIM and UK Select Funds said there are a number of financial sector London IPO’s at the marketing stage across his desk at the moment. Whether they make the leap from fund managers’ desks to London-listed companies could, at least in part, depend on River and Mercantile and TSB.
Mumford said that TSB will be an interesting deal to watch because you can look at it in two distinct ways. On one hand you can take the view that with only 25% of the company being offered it should be successful and see more than enough demand. However, you could argue that it will be hard for investors to judge the long term prospects because the other 75% could come onto the market at some time in the future and create oversupply. His view, is that the latter scenario could be the dominant one and he is steering clear.
“For any IPO it’s all about valuation and the new CEO has indicated that a dividend payout could well be some way away,” said Michael Hewson, chief market analyst at CMC Markets. “With that in mind as well as potential future regulatory burdens, the TSB valuation would have to be very compelling to attract retail investors, let’s not forget they are doing this IPO because they have to, not because they want to,” he added.
Others’ concerns are not specific to TSB but the IPO space in general. “The rush of IPOs reflects a potentially frothy market,” said Simon Gergel, CIO for UK equities at Allianz Global Investors. “We should be more fearful than greedy at present, the sellers of these businesses have far more information than the buyers and can time their exit to suit themselves so investors need to be vigilant,” he added.
Gergel also noted he has been surprised by the number of IPOs that have launched this year and the enthusiasm with which they have been taken up and it is not surprising that there is now “an element of indigestion”.
“The current IPO success rate really isn’t that high,” cautioned Ferdinand Mason a Partner at Jones Day. “Increasingly, announcement of an intention to perform an IPO does not necessarily mean it will happen,” he added.
