The Warsaw stock exchange listing of Allegro, which valued the company at more than EUR 15bn, has shown the region can produce companies that can cause a splash on the capital markets. As investors have successfully grown their portfolio companies in CEE, IPOs are increasingly considered as the most efficient and profitable exit strategy.
The region was the launchpad for a record initial public offering (IPO) in Europe in 2020, when Poland’s Allegro made a spectacular debut on the Warsaw exchange. A local rival to eBay, the online auction platform’s shares soared by 60% on the first day’s trading in October, sending its market value to PLN 71.6bn (EUR 15.8bn).
It immediately became the largest company on the Warsaw market following the sale of a 24% stake, but it was not just the largest listing in Poland during 2020—it was the largest on any European bourse. Allegro even outshone UK online shopping business The Hut Group, which listed in London in September with a valuation of GBP 5.4bn, the largest London listing for five years.
After a difficult year for new listings around the world in the wake of COVID-19, the success of two mega-flotations raised hopes of a renewed appetite for IPOs. Rafal Zwierz, CMS partner in Warsaw, points out: “Allegro’s successful listing was a good sign. It shows there is investor interest in the market. Only time will tell if the market is coming back to life or if Allegro was a one-off case.”
Turning the tide?
If Allegro put Warsaw and emerging Europe firmly on the international IPO map, it followed a lean period for new listings in the region. The ones that made it to market in 2020 included games company Gaming Factory in Warsaw, Czech gun maker Ceska Zbrojovka in Prague, and telecoms group Telelink Businesses Services Group in Bulgaria.
Confidence was fragile, as illustrated by broadcaster Canal + Polska cancelling its planned Warsaw IPO citing “recent volatility in financial markets” and promising to return when “the situation on financial markets is more supportive”.
For business owners and selling shareholders, valuation is usually the most important factor in deciding which exit route to follow. The recovery in global capital markets following the shock caused by the pandemic means IPOs are again becoming a potential exit option, although private equity funds still have substantial financial fire power at their disposal.
This allows vendors to adopt a dual track approach where they can play off capital markets against private equity. Trade buyers whose attention may be more focused on redressing their balance sheets are likely to be reluctant to get involved in bidding wars for acquisitions, although listed companies that have benefited from a rise in their share price will have a currency to use for M&A.
Alasdair Steele, CMS partner and Head of Equity Capital Markets, says: “I’m not convinced trade buyers are prepared to spend money yet, so it will be between private equity and the capital markets. I suspect both will have cash to burn, so it will boil down to who’s got the most confidence.”
Where valuations on offer are broadly similar, other factors come into play. An IPO allows the owner to retain an interest in the company, rather than selling outright to a corporate buyer or being beholden to a single private equity owner. It also offers the opportunity to return to the market for additional capital and raises the profile of a company through media and analysts. But it can be costly, as well as burdensome and time consuming, in terms of regulatory requirements.
Warsaw’s ability to manage the Allegro float has shown that companies and investors do not have to look to Frankfurt, London or New York even for the largest listings. It is also a reminder that capital markets in the region have advantages, such as the eco-system of brokers and advisers who have established connections with vendors and investors and understand the requirements of local regulators.
Going down the dual-listing route may offer the best of both worlds, providing local market comfort and security alongside the increased profile and reach of an international market. Warsaw can stake its claim as the natural location for regional companies seeking a dual listing and which might previously have looked further west.
Emerging Europe has shown that it has become mature enough to grow and build businesses that can stand alongside their international counterparts. It has developed a sophisticated financial eco-system that can guide a business into whichever structure of sale bests suits the owners.
It is home to a growing number of “unicorns”—companies valued at more than USD 1bn. Among those seen as potential IPO candidates in 2021 are Romanian software group UiPath, Polish e-commerce group InPost, Polish convenience store chain Zabka, and Czech real estate developer CTP.
Zwierz notes: “There are a lot of companies in the region that have the potential to be listed. A decade ago, the IPO market was very strong and while I don’t think we’ll get back to that level very soon, there are some hopeful signs.”
From an investor’s perspective, life sciences, technology and telecoms are attracting most attention and will be able to generate the highest valuations. Steele says: “There is anecdotal evidence that last spring, fund managers moved holdings into cash which they are now preparing to deploy when the right opportunities come along. It could mean a busy start to 2021.”