Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

It wasn't meant to be like this. Deutsche Bank has had to prop up one of Europe's largest IPOs this year -- shattering the common wisdom that big initial public offerings are more resilient than smaller ones. It also looks awkward for the German bank, which many people think needs propping up itself.

The IPO of Nets, a Danish payments-processing company, on Sept. 23 had seemed to confirm a turnaround in what had been otherwise a lackluster year for Europe's IPO market.

European Revival
Nets's September offering helped reverse a decline in the number of IPOs
Source: Bloomberg

The company sold shares above the mid-point of the price range amid strong investor demand, a rare sight in Europe this year. After going public at 150 Danish kroner, the stock briefly touched 157 Danish kroner in its first hours of trading. Here was evidence bigger deals, being more liquid and therefore easier to trade, could look after themselves.

Nets's Slide
The company's stock is down almost 4 percent since its IPO
Source: Bloomberg

Then things unraveled. Nets closed down 3 percent on its first day. The weakness continued and the stock hit a low of 136.40 Danish kroner on Oct. 3.

Deutsche Bank, the nominated stabilization agent among the group of banks managing the offering, stepped in to buy 9.5 million shares in their first two days of trading, according to the disclosures made so far. At today's prices, these shares are worth 38.4 million Danish kroner ($5.8 million) less than Deutsche paid for them.

So a financial and reputational hit for Deutsche Bank and its fellow global co-ordinators Morgan Stanley and Nordea?

Not entirely. In IPOs, bookrunners typically place more shares with investors than they actually have. If the price goes up, this short position generates a paper loss, and the IPO sellers then provide the banks with additional stock to cover the short. If the price goes down, as happened with Nets, the bookrunner covers the short by buying shares in the market. Because these shares are bought below the issue price, that actually creates a profit.

Depending on its contract with Nets' vendors, private equity firms Advent and Bain, Deutsche Bank may have to share any profit on the stabilization exercise with them. And it will probably get a lower IPO fee because the overall issue will be smaller.

Nets stock is now on the way back up. There's a possible technical explanation for its rollercoaster debut: investors may have been more cautious at the end of the second quarter, regaining their mojo now October is here. In the meantime, other IPOs fared worse: Telxius Telecom had to pull its offering.

Then again, markets have fallen and risen in the last two weeks in line with the perceived fortunes of a single Frankfurt-based financial institution -- Deutsche Bank. What an interesting place to work right now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net