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's official. One of the biggest IPOs of 2016 was mispriced.

A bunch of analysts think shares in Nets A/S aren't worth the selling price in September's initial public offering. Some of these number-crunchers happen to be employed by the banks that did the deal.

Nets shares have never closed above their 150 Danish kroner issue price and were 126.5 kroner on Thursday. Analysts at Deutsche Bank AG and Morgan Stanley, two of the three banks that ran the deal, still have price targets of 150 kroner and 160 kroner for the Danish payments processor.

Net Loss
Danish payments processor Nets has underpeformed both peers and the broader market since its debut.
Source: Bloomberg

But their peers at Nordea Bank AB, the third bank in charge of the offering, have a price target of 140 kroner. Analysts at Danske Bank A/S, JPMorgan Chase & Co. and UBS Group AG -- firms with a lesser role on the deal -- are at 130 or 140 kroner a share.

The analysts' research was available to prospective investors. Some of it would not have contained price targets back then, though Danske gave a 110 to 140 kroner price range.

These equity analysts are required to operate independently of the corporate finance divisions which handle IPOs and collect the fees. They are now being seen to be independent too. Despite that, their views didn't much influence Nets' IPO price, which was set by supply and demand in a short investor roadshow.

The price-setting process worked by investors saying how much stock they wanted and what they were willing to pay. There were enough orders at 150 kroner a share to buy the issue several times over. The current share price suggests this so-called book build didn't get to the right valuation, and the analysts were closer to the mark. 

Nets seems to have attracted demand in quantity more than quality. Many of those that clamored for the stock were evidently short-term investors with no staying power. When it was clear Nets was not going to hold above its issue price, they dumped their holdings.

It Ain't Easy Being Third
Shares of Nets, the third-biggest IPO of 2016, have suffered since its debut in September
Source: Bloomberg

Not all IPOs go like this. Perhaps Nets' sheer size was unhelpful. This was Europe's third-largest deal this year, with $2.4 billion of stock being sold, and the company has suffered from some recent worries about mobile payments in the Nordic region.

It's a reminder to banks selling IPOs that quality, not quantity, of demand is what counts. IPOs will always suck in short-term money and if many buyers are in it for a quick turn, the shares will suffer. More cautious investors may want to skip the IPO, let the stock settle in the market and buy at a later date. And read the research.

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:
Jennifer Ryan at jryan13@bloomberg.net