London’s biggest flotation since the onset of the financial crisis has got off to a less than spectacular start on Tuesday morning.
Recall that Essar, a £5.4bn oil and gas producer being spun out of one of India’s biggest conglomerates, was forced to cut the asking price for its IPO at the last minute, selling 300m shares, or 23.2 per cent of the company, at 420p per share – below the intended 450p-550p range.
And on debut day, its shares are now trading 7 per cent below that revised price.
Once again, this shows fund managers still have the whip hand when it comes to flotations – and the decision to lower the price had nothing to do with the financial crisis in Greece as Essar and its advisers claimed.
And in the case of, Essar institutions are right to be wary, as former AV’er Miles Johnson has noted.
Some of the issues that have worried the City include:
Essar Energy has been dogged by questions over corporate governance since it announced its intention to float. Non-public marketing research produced by JPMorgan Cazenove warned investors of “a complex structure and a lack of clarity on the flow of funds between the UK unit and its Indian subsidiaries”.
And a small free float – the company is controlled by Shashi Ruia and his brother Ravi. Assuming the greenshoe isn’t exercised, they will maintain a 76.7 per cent holding in Essar.
And a fancy rating to justify.
By achieving a market value of £5.4bn, the company will start trading at 20 times forecast 2010 earnings, compared to an integrated oil sector average of about 15 times. This will however fall to 7 times by 2012 when it expanded operations come onstream.
Indeed, the FT’s Lombard column recently noted that Indian energy group’s have a far from sparkling track record.
Most of the seven Indian energy groups that listed in the past two years now trade below their IPO price. And Essar is hardly priced to go. Using capacity to be installed in the next few years and consultants’ preferred multiple of Rp30m/MW values the power business at $4bn – yet these operations are reckoned to make up half of the group’s implied $10bn-plus equity valuation. Essar has yet to make a cent on an annual basis. Then there are environmental concerns, regulatory risks such as price-capping and volatile fuel costs. For sure, Essar has secured some supplies and is addressing governance worries by installing independent directors. Even so, only the bravest of investors should be flicking the switch on this one.
Still, it’s probably better than holding BP at the moment. Although…
Related link:
Essar goes for less – Lombard