Where the IPO Action Is: Europe

Investors on the Continent are ready to get in on a crop of new issues. First up, Orange PLC

Haven't heard much about initial public offerings lately? Hot IPOs may be a fading memory in the U.S. after last year's market swoon. But financing of the public markets in Europe is still very much alive. There, investors are looking to get in on the IPO of French mobile-phone company Orange PLC, which will likely be one of the largest deals on the Continent in 2001.

Schroder Salomon Smith Barney research estimates that European IPOs will raise $184 billion in 2001, compared with $154 billion in 2000. The highest concentration of deals will be in high-tech companies, particularly cash-needy telecoms. Other offerings are expected to come from utility companies, financial companies, and other services.

One group that's hoping to cash in on the hot European market: online brokerages. E*Trade Group, for example, announced recently that it will offer shares in Orange as the first step toward offering other IPOs all over Europe. "The European marketplace provides a lot of opportunities for companies to raise capital. It's a little better than the U.S.," says Johan Brenner, CEO of E*Trade Europe. But he cautions that the future growth of European IPOs hinges heavily on the fate of the U.S. economy. "If you see a deteriorating market in the U.S., then IPOs will be postponed in Europe as well," says Brenner. Nonetheless, Charles Schwab, CSFBdirect, and Ameritrade have all recently made forays into Europe.


  At first glance, Orange has it all -- a strong brand, a top position in its market, and high-tech sexiness -- but in fact, even it has proven to be a tougher sell than expected. The IPO was originally expected to raise 70 billion to 80 billion euros for the company. Instead, it priced about 20% lower, in the range of 55.2 billion to 64.8 billion euros, with the share price expected to fall between 9.5 and 10 euros. Trading on the London and Paris exchanges will likely start on the afternoon of Feb. 13.

Some managers have their sights on Orange's low per-share price. "Yes, we think it's a very interesting IPO right now," says Imad Kanaan, fund manager at Financie Rembrandt, who plans to buy into the company. "I think with the lowered price and dominant position in France, it's a good opportunity." Kanaan says, in general, he considers IPOs on a case-by-case basis, but he likes mobile-phone companies that have dominant share in their markets.

After its heavy discount, the Orange offering should fare decently, but many fund managers remain wary. "Investors are so skittish over telcos and techs. If they're not priced attractively, there's no way to float the whole issues," says Barbara Mascarelli, vice-president for investment research and management at Sit Investment Associates.


  Indeed, some investors say they'll pass on the raft of European telecom deals coming down the pike, which include Deutsche Telekom, KPN Telecom, and British Telecommunications. Her company already has holdings in several European telecoms, but "there's nothing I can see coming out that we would be interested in," Mascarelli says. She notes that deals in Europe are typically small to begin with, limiting the amount of available shares. Unless the offering looks really solid, she says, it's simply not worth the effort to fight for a cut of most IPOs.

But Rosemary Sagar, head of global investment at U.S. Trust, expects to see more cases like Orange, once pricings in general are slashed. She has raised her standards on IPOs significantly. While Sagar is open-minded about investing in new issues from varying sectors, she says she's in the process of downgrading her outlook for wireless operators in general. "The dynamics are not that compelling. There have been too many telecom deals, and it's going to be hard to get them done well," Sagar says.

Sagar points to the high-tech slowdown as a major reason for fund managers' reluctance to jump into IPOs. "The whole economic backdrop has to be reassessed," she says. "Beneficiaries of that economic growth have fallen by the wayside, so we have had to change our valuation criteria."

The good news is that fund managers are expecting that the quality of deals in Europe will be high. "IPOs are undergoing a lot more scrutiny by investors," says Sam Lee, fund manager at Sit Investment. "Investors are not just buying to catch up on the game." Even though the European IPO scene is far more vibrant than the in the U.S., raising money in the public markets over there is still difficult, so most likely only the strongest deals will survive on the Continent, too.

By Amy Tsao in New York

Edited by Douglas Harbrecht

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