Merrill Lynch has now been associated with three disappointments in UK retail – as one of four banks that brought Debenhams back to market last year, as the lead bank on sportswear chain Sports Direct’s IPO earlier this year, and as auctioneer of New Look. Shares in both Debenhams and Sports Direct continue to trade well below the offer price, while the New Look sale was aborted this week after bids fell short of the reserve of £1.8bn.
Should Merrill bear part of the blame, and, more to the point, are these disappointments likely to affect other sellers’ willingness to hire Merrill’s shop to shop their shops, or buyers’ enthusiasm to do business with it?
Blame first. Pricing sales – whether of shares, or of the whole business – is often more art than science. But banks take a big chunk of fees – and responsibility. IPOs can “fail” in several ways: if the bank prices them too low, the first-day “pop” will be taken as evidence that it left too much value on the table; too high and it will be accused of blighting the shares in the aftermath of the flotation, even if the bookrunner’s responsibility extends only for a short period beyond the sale. After that, outside events – the weather, the retail environment, or, in Sports Direct’s case, poor communication by the company itself – can undermine shareholder value.
Auctions are different. Reserve prices reflect the adviser’s best estimate of enthusiasm for the asset on the block, but clients have their say, too. Merrill had to go along with the decision by Apax and Permira, New Look’s private equity owners, not to drop the price, even though it knew it would receive no fee for its efforts if the sale did not go through.
As for bad publicity, Merrill still rides high – a narrow second to JPMorgan – in Dealogic’s first-half league table of IPO issuance in the UK (helped, it must be said, by the Sports Direct deal). One banker said that to search for links between these three transactions was like mixing “apples, oranges and grapes”. That is true. But if you’re running the fruit-stall, you can’t afford to irritate your customers too often.