Private equity's bluff has just been called.
Companies trying to sell off assets can now credibly say they will turn to the IPO market if they aren't offered a high enough price by private equity bidders. Until recently, that had seemed like a hollow threat given the poor performance of European initial public offerings this year. But the success of Philips Lighting shows that issuing shares to stock-market investors is a viable alternative.
The Dutch electronics group has sold part of its lighting business at 20 euros a share, giving it a market value of 3 billion euros ($3.4 billion). In the first hours of trading the stock ticked up as much as 9 percent, to 21.80 euros, and held on to most of the gain.
That's a textbook debut -- a nice bounce, neither a frenzied 20-plus percent pop nor a fall below the issue price.
It's a stark contrast with several recent European IPOs that had been characterized by an unseemly rush among investors to dump the stock the minute they received their allocations.
Philips seems to have been able to leave buyers wanting more shares, even after it sold the 750 million euros of stock in the offer. This usually requires two feats.
First, roping in orders for about four times the amount of stock for sale -- for a deal of 25 percent of the company that effectively means finding demand for 100 percent. And second, finding buyers who are predominantly long-term investors rather than faster-trading hedge funds.
In this case, Philips Lighting may have been able to attract more long-term investors because it is a known quantity and the sheer size of the offering minimized the risks of extreme price swings that might normally have deterred buyers.
The deal didn't start off this way. Philips had wanted a clean sale and private equity firms were keen -- but not at the right price. Hence the switch to an IPO.
It's a similar story to what Deutsche Telekom encountered in February, when it pulled the disposal of its T-Mobile Netherlands unit after bids from buyout houses fell short of the desired 3 billion euro valuation.
Philips' success should embolden Spain's Telefonica as it looks to raise money from its U.K. mobile business, O2, after regulators block the unit's sale to Hong Kong-based CK Hutchison. O2 is the current hot target for private equity. Telefonica should know it can sell a stake to the stock market if bids for the whole fall short.
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