Analysis - The Resurgence of IPOs in the Drinks Sector
By Melanie Frean and Vasu Majumdar at Grant Thornton UK | 7 January 2014
Could an IPO be right for your company?
The London Stock Exchange recently announced that 2013 was its best year for flotations since 2007, with 105 companies raising a combined GBP15.7bn (US$25.73bn) from initial public offerings (IPOs) in the year. Of these, 43 businesses floated on the Main Market and a further 62 groups listed on AIM.
Looking at sector trends for the past six months to a year, the most interesting companies floating right now are part of a broader FMCG sector, including technology, retail, consumer services, entertainment and beverage companies. It is companies in this consumer-focused sector that are getting institutional investors most excited at the moment. We have waited a long time, but with the markets finally re-awakening from a six-year snooze and the dust being shaken off institutional cheque books, this is an opportune time for drinks businesses to think about whether an IPO is something to start planning for.
In 2013, three very different companies in the drinks sector joined the London markets:
Conviviality Retail burst on to AIM in July 2013 raising GBP64m (before expenses), of which about half went to the exiting shareholders and the remainder cleared down the group's debt burden. Conviviality owns the UK’s largest franchised off-licence and convenience chain with 611 franchisee-operated stores. The stores are located throughout England and Wales and operate under six fascias including Bargain Booze, Bargain Booze Select Convenience, Thorougoods and Wine Rack. By clearing out the debt and replacing the private equity (PE) house with new institutional backers, chief executive Diana Hunter told the market that the group had an exciting future ahead, with its new debt-free capital structure, an incentivisation plan that aligns its 461 franchisees with management and shareholders, and capital to expand its stores nationally. Since coming to market, Conviviality has consistently traded above its IPO price, has shown reasonable liquidity and has started its expansion plans with the acquisition of Wine Rack. Some industry observers believe the company operates a highly efficient cost structure and has inherently strong cash flow, due to its low capital and asset intensity. With an ungeared balance sheet and strong cash generation, management is proposing a dividend yield of 8%, more than double the peer group average of 3%.
In early September we saw UK wine producer Gusborne Estates come under AIM-listed Shellproof's roof, raising GBP2.85m and forming a wine business (Gusbourne plc) focused on Kent and Sussex, with plans to double its vineyard acreage to 200 acres. English wines now regularly win awards and at the International Wines and Spirits Competition in November, Gusbourne Estates was awarded 'English Wine Producer of the Year'. English wine, particularly the sparkling variety, is becoming big business. Gusbourne is still a small player in the market, with annual revenues under GBP500,000. But, it has potential to grow as a combined business and its share price is now trading up almost 80% since September. They just have to hope for better weather.
At the other end of the scale, Stock Spirits Group, a leading Central and Eastern European branded spirits producer, completed its IPO and joined the Main Market of the London Stock Exchange in late-October raising gross proceeds of GBP258.5m. Stock has a portfolio of 25 branded spirits and has the largest market share for spirits in Poland and the Czech Republic, and is the leading vodka company in both countries. It came to market to raise money to support its ambitious growth plans and to specifically reduce its debt as well as to give partial exits to its PE backer and other shareholders. It came to market priced lower than expected after Diageo walked away from a deal to buy the group in 2011, but it seemed to have initially got the pricing right as the share price fell away on the day of its admission but has since rebounded and has been trading more recently around 15% to 20% up on its IPO price.
It’s a huge decision to go public, probably one of the most significant decisions a business may ever take. The preparation and process to list will be time-consuming and hard work, and management and shareholders may need to instigate big changes to meet the challenges of being a public company but the potential rewards and benefits are plentiful.
The London public markets provide unparalleled access to capital for growth – both at IPO and through further capital raisings at a later date. Listed companies will receive comprehensive analyst and media coverage, plus coming to market can reassure customers and suppliers that the company has received regulatory approval and has undergone a rigorous due diligence process. A listing may enable shareholders to realise the value of their holding, which can help broaden the shareholder base and allow existing investors to exit. Issuing shares also encourages employees to participate in the ownership of the company helping to foster a sense of shared endeavour and accountability. And, if management has an acquisition strategy, then having tradable paper to buy businesses with can be an attractive currency.
On the flip side, living life in the public eye can prove onerous and uncomfortable. Bad news as well as good news has to be shared with the market, and share prices can experience a marked impact from a drop in trading or the loss of a major customer. Financial reporting needs to be concluded within shorter timelines than management may be used to, and corporate governance becomes hugely important. Also, extending an invitation to new non-executive directors to join your board may be quite a challenge to some owner-managers.
There are many advantages and disadvantages to floating your company. Thorough analysis and working with experienced and supportive advisers, will help determine the right route to achieve your company's goals.
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