Convincing analysts and fund managers that a stock is worth supporting is a hard enough job at the best of times. It’s even more difficult when the sector remains something of a mystery. Nasdaq-listed biotech developer, Ethical Holdings, found that out to its cost a few months ago when it tried to persuade UK investors to back its proposed £20 mn London float. A lack of interest from brokers and fund managers forced Ethical to pull the flotation and abandon a linked £14 mn acquisition.
One reason cited for the float’s failure was that investors were well-stocked with biotech shares and didn’t want any more. Ethical was too small, went another. However, one sector analyst disagrees: ‘Ethical didn’t put enough effort into its campaign. It relied too much on hype around the biotech sector.’
Marketing and bookbuilding difficulties can become acute when a company is engaged in a relatively strange sector. Strange, that is, to the financial community in the market the company is targeting. Comparability and relative strength are meat and blood to analysts and fund managers. It’s up to the company to provide a detailed background on its market.
Safe Bet?
There are exceptions. Some companies are viewed as delivering a ‘must-have’ product or service, and the market thinks it knows what revenues are going to be for years ahead. A good example is the Portuguese monopoly motorway operator Brisa, which is scheduled to be privatized this year. With an exclusive concession to operate Portugal’s toll motorways until 2025 at least, Brisa has been provisionally valued at $850 mn. About 30 percent of the equity will be sold in the IPO and one brave Lisbon analyst predicts that there will be no problem placing it: ‘Forecasting earnings is very straightforward.’ In his view, Brisa shares are almost as good as bonds.
Generally, though, promoting companies that trade in unfamiliar goods or areas is an uphill task. Those pioneers that have made the arduous journey say that education and attention to detail is the answer.
Simon Eaton of Burson-Marsteller in London points out that introducing a technology-based company to the European investment community requires a careful and structured approach. It helps if there is a significant amount of press management, too. ‘The principal strategy is to translate technological language into investment-speak’, he says. ‘You have to be able to explain the technology quickly, simply and succinctly – and to position the business and its technology within its market, particularly by providing credible examples of what the technology can and might do.’
Technologically innovative companies are sold to the market on the basis of future prospects, Eaton says, and usually have small or no cashflows with significant losses. ‘The secret is to strike a balance between what the market expects and what the company is capable of achieving.’
In Eaton’s experience, the media plays an important role in marketing – even more so than the brokers and the issue’s sponsors. ‘It is vital to keep the company’s name before the potential investors, and one or two good exclusives in decent papers will achieve that far more than a series of roadshows.’ It’s all about wetting people’s appetites, he says, through regular information and good communications.
Dam Difficult
With businesses engaged in activities considered unusual or unfamiliar in a particular market, the problems may often appear insurmountable. For instance, how is a value put on a hydroelectric dam in the heart of the Borneo jungle? Patient attention to investor education or persuasion may work, and site visits may help convince skeptical fund managers the project is viable. Unfortunately for Ekran, the Malaysian infrastructure company, attempts to generate investor interest in a rights issue to fund the dam’s construction fell on stony ground.
One Malaysian analyst says major opportunities were missed, with the rights issue handled in a lackluster way. ‘It didn’t help,’ he says, ‘that senior Malaysian government ministers were divided over the project and several actively opposed the dam.’
Ekran’s rights issue flopped, with only one-third of the target M$1.5 bn being subscribed. The company is having to sell a subsidiary to raise the cash. Plans to buy a one-third stake in the proposed dam operator, have also been put on hold.
The reason, say analysts, is a growing feeling of unease both with the dam project and with Ekran and a lack of relevant communication from the company. The issue’s failure has had significant knock-on effects on Ekran’s development program and highlights the dangers of investing in a poorly-explained market with uncertain outcomes.
Against all that, once fund managers get a bee in their bonnet there is often no stopping them and they happily venture off into the unknown. The current predilection for Russian equities is a typical example of investment decision-makers casting aside caution on the basis of a gut feeling or reckless search for short-term gains.
Moscow share prices have increased by nearly 160 percent since the beginning of the year and some companies’ equities have risen seven-fold. Yet the fundamentals would normally put a stop to the investment rush. The Russian economy is in decline, for the eighth consecutive year; accounting practices are arcane and obfuscating, allowing virtually no sensible price/earnings or other analyses to be derived; many companies are technically bankrupt and have failing abilities to generate cash; increasingly, companies are not paying their bills or are offering barter terms; gangsters and fly-by-nights beset growing numbers of commercial enterprises.
A Paris-based fund manager sums up her dilemma: ‘I have to invest in the Russian market, because if I don’t my director will want to know why the bank is missing out on a market where the index has risen from below 200 to over 500 in just six months.’
In normal circumstances, explaining and promoting Russian equity issues would be an arduous task, especially as few western analysts and fund managers have a good understanding of the Russian business environment or the complexity of the country’s enterprises. By and large, though, the task is made easier by the financial community’s willingness to suspend disbelief and caution and go instead for what may prove to be a will-o-the-wisp. The Russian market and Russian companies are, however, the exceptions that prove the rule.
Lifetime Commitment
The process of educating and encouraging analysts and the fund managers is a continuing one. ‘An IPO is for life,’ says one analyst, ‘but often newcomers do not appreciate that. Once the initial junketing and brouhaha are over, some company managements believe their task is done and it’s like getting blood from a stone to get information and future plans from them.’
‘If a business is out of the ordinary,’ adds another, ‘it is crucial to keep up the information flows, especially where the underlying activities are technically complex.’ For conventional or well-exposed businesses, it is important the financial community believes in a debutant company’s management and its ability to cope.
On balance, for non-mainstream issuers, the recipe for successful entry to a skeptical market is simple: reliable information, leavened with adequate education and guidance. And serve it up regularly.
Repairing the Image
The promoters of ship-repairer and converter Cammell Laird, which joined the London main market in July, had a problem. The name of Cammell Laird was well-known throughout the world; it was part of Britain’s industrial history. The snag was that most people thought that the company was defunct. As a shipbuilder, producing in its heyday one new ship every two weeks and employing thousands of workers on Merseyside, it had run into massive industrial strife and that was what most people remembered.
The present company derives from a small group of marine technical services and ship repairers that in 1995 bought the former Vickers ship repair and conversion facilities in Liverpool and the right to use the name ‘Cammell Laird’.
‘We had to show that the present-day Cammell Laird was not the old Cammell Laird but is an effective, profitable and non-unionized business,’ says Christian Hobart of sponsoring brokers Beeson Gregory. ‘It has a tremendous order book, with some superb clients, including the Ministry of Defence and some major global concerns.’
Hobart says that marketing the issue was made more difficult by the comparative decline in the UK market for small cap company issues, which he describes as being in freefall. ‘There is a huge disparity between the main listed stocks and the small caps. Since the beginning of the year, there has been something like a 22 percent underperformance by the small cap sector.’
The way forward would be to build up a strong base of local investors, in and around Liverpool and the North West area, particularly among the region’s private client brokers. ‘Once we had local support, we could tackle the London institutional investors,’ Hobart says.
The key elements were visits by brokers and leading institutional players to the Cammell Laird yard. These were very effective, Hobart says, and generated a positive response. The presentations ranged from small group meetings to a full day-long promotion.
‘Then we spoke to people in London, on a one-on-one basis for the biggest small company sector funds and in groups for the others. The response was surprising. We had an initial order book that was more than twice oversubscribed and had to do quite a bit of juggling.’
In continuing difficult market conditions for small caps, first day dealings saw the shares gain 15 percent on the 100 pence placing price. On current figures, Cammell Laird is capitalized at around £23 mn.
The secret of Beeson Gregory’s success with a small company in equity market conditions that had forced other small caps to abandon their flotation plans? ‘A strong story, well told,’ says Hobart, ‘backed up by very good research and background material.’ What also made a difference in his view was that Beeson Gregory mounted a rigorously structured operation. ‘It was like a military campaign.’
Generating Interest
In the opinion of a number of academics and professionals in the electricity industry, the prospectus for British Energy’s June 1996 privatization was as good as many of the textbooks regularly turned to by by electrical and nuclear engineers.
The company’s principal activity is the generation and sale of electricity and it operates eight nuclear power stations in England and Scotland. It was sold by the British government and for a variety of reasons the conditions were relatively complicated.
Given those circumstances – and since few analysts and fund managers felt at home in the rarified fields of electricity generation and the nuclear industry – the IPO’s promoters faced a massive program of investor education. They weren’t helped by a hostile media campaign mounted by environmentalists.
Marketing adviser Dewe Rogerson’s Andrew Hey says that the primary task was to get across the nature and promise of British Energy’s business, since there was nothing directly comparable against which to set the company’s record and prospects.
‘British Energy was a difficult company to understand,’ he says. ‘There were negative values attached to the nuclear industry and a series of economic arguments about the long-run viability of the industry.’
Hey says what was needed was to create a level of familiarity in the investment community. ‘The market education campaign started three months before the launch date. We had to get across complex accounting information and show the management understood the business and was addressing all the problems that would develop – such as power station decommissioning.’
The company mounted a program of site visits, over six or seven weeks, for analysts, the media and fund managers and institutional groups. British Energy and BZW, the global coordinator and book runner, hosted institutional dinners between company directors, executives, and senior investment managers. Since the government was determined to bring the retail share shops into the act, there had to be a structured program of presentations to intermediaries.
In Hey’s view, the meticulous approach taken to gathering and putting over a mass of information paid huge dividends at the end of the campaign. ‘We mounted detailed presentations and did not duck any difficult questions. Also, we made every effort to strip out industry jargon.’
The issue raised £1.4 bn, with around 48 percent of the equity going to institutional buyers and 52 percent going into the retail market. Coming hard on the heels of the successful Railtrack privatization, the offers drew more than 600,000 applications, and the book was covered 2.4 times.
‘It certainly worked well,’ says Hey. ‘The key was the way in which we were able to promote a better understanding of what is a difficult and complicated industry.’
