Porsche IPO Speeds Into History

In this week’s episode, we discuss Porsche’s historic IPO, the biggest public listing in Europe since 2011, with Sam Kerr, a senior ECM editor in EMEA at ION Analytics - Dealogic and Mergermarket. The IPO defied volatile markets to list the luxury car brand at a valuation of EUR 75 billion in Germany's second-biggest market debut.

Listen, and you’ll learn about:

• Why the Porsche IPO happened despite market volatility
• Investments made by the sovereign wealth funds of Norway and Abu Dhabi and mutual fund company T. Rowe Price
• Valuation challenges
• Initial concerns about Oliver Blume serving as CEO of both Porsche and Volkswagen
• If more luxury brands will follow in Porsche's footsteps

Dealcast is presented by Mergermarket and SS&C Intralinks.

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a business journalist who's been covering M&A for a decade. In this episode, we're finding out about Porsche's IPO, the biggest listing in Europe for some time. I'm joined by Sam Kerr, who's the senior ECM editor in EMEA for Ion Analytics. Hi, Sam. Thanks a lot for joining me.

SAM KERR: Thanks for having me.

JULIE-ANNA NEEDHAM: So, firstly, why did the Porsche IPO happen, given this really significant market volatility?

SAM KERR: Well, I think there's one answer to that, is it's Porsche. It's the most high-profile name in Europe's IPO market for decades, I would say, and it's an exciting luxury brand that everybody wanted a piece of, whether you were a banker and, seemingly, if you were an investor as well. So I think Porsche was probably the only name that could have got done in this sort of market, and it's a testament to the company's appeal that it managed to go ahead regardless of a terrible market in the first place. It is a behemoth brand, as it were, and if it weren't Porsche, I'm sure it wouldn't have happened.

JULIE-ANNA NEEDHAM: So what kind of work took place before the IPO? What conversations took place with investors because I'm guessing they did quite a lot of groundwork to test the market before they decided to press the button with it?

SAM KERR: A huge amount. I mean, so we were, originally, talking to bankers about a possibility of a Porsche IPO in February. And in all credit to VW and Porsche, I mean, they started sort of appointing banks earlier in the year and managed to get the deal done within the 12-month window. So actually, that was quite quick for a European IPO. And in lots of other cases, we talk about multi-year processes.

Often, a bank will be mandated one year, and an IPO won't happen to the following one. But with Porsche, it was a quite quick process, even given the fact that it was seven, eight, nine months, but there was a lot of work to do. And I think a lot of the work that had to be done was centered around valuation. So there was a real desire among advisors on the deal banks.

I'd imagine with VW themselves as well to not do an Aston Martin, which was obviously the last luxury car maker to hit up Europe's IPO market, and it was a disaster. Now, we all can say that, and it's not a controversial thing to say that Aston's IPO is one of the worst in Europe in the last few years. Aston's great problem at the time was they benchmarked themselves far too closely to Ferrari, and Ferrari is the absolute gold-standard brand in this market.

It is a luxury car company that trades like a luxury. It trades far closer for example to LVMH in terms of its multiples than it would ever trade to some of the other big listed auto brands. Porsche had to be very careful about not benchmarking too close to Ferrari. So the idea for Porsche was where do we position ourselves, and where do we position this company and for VW as well.

And it was a tricky one because there was actually no other company that fulfilled the same profile as Porsche. Porsche does make a smaller number of-- far smaller number of cars than, say, a Mercedes or a BMW. So it's far more exclusive than something like that, but it still produces numbers within the hundreds of thousands every year, which is less than Ferrari, which only produces sort of 11,000 cars a year, I think, was the last year that it did that we have the numbers for.

So Porsche really came along and positioned itself very much as a unique asset and right in between where Ferrari and Mercedes were trading. So it looked at eDE, [INAUDIBLE] both those companies. And when we spoke to the guys on the deal, those were the two names that Porsche was looking to get in between, Ferrari and Mercedes. And if you look at the final valuation, it is close. I mean, not quite, but bang in the middle of the two. So that education process, and that work to position the company and to find out exactly where investors were happy, I think, took quite a long time.

JULIE-ANNA NEEDHAM: And what kind of investors took part in that education process?

SAM KERR: So a lot of the interesting work that got done on Porsche was actually bringing in investors right at the beginning of the IPO and then also even before the bookbuild. And what we saw was sovereign wealth funds taking a real interest in the stock. So the Qatar Investment Authority were named on the deal as soon as the pre-deal education as we call it in the IPO market launched.

That was about two weeks before bookbuild started. Then they were joined later by Norges, by the Abu Dhabi Sovereign Wealth Fund, and then the T. Rowe Price in America as well, which obviously, acts as a very long-term investor as well of serious size. So they were very much tier-one benchmark names who wanted a sizeable allocation in Porsche.

And interestingly, with Qatar Investment Authority, they're a very big investor as well in VW. So it was already showing that strategic harmony between the two units, and Qatar obviously wanted to have a separate investment in Porsche as well. With Norges, it was an interesting one. We were one of the first new services to report that Norges were going to be placing a big order in the IPO. And the reason for that was it was the only way that Norges could get an allocation commensurate with its size. It's such a big investor.

And in order for it to get the share number that would actually make a difference to it, it had to sign on as a cornerstone investor at the beginning of the book opening process. So Porsche, I think, was very, very fortunate in that it had that sort of appeal, and there was a perception already among the market that there were going to be a bit of a scarcity of shares. And so the big investors had to come in right at the beginning and put their money where their mouths were, as it were.

JULIE-ANNA NEEDHAM: And so they had these sovereign wealth funds, some really important cornerstone investors, which supported the stock before it went out to the wider market, but how did the deal go?

SAM KERR: Well, I mean, the deal went really well. It obviously was huge amount of oversubscription for it. They managed to zero around half the book, and that means that when you put an order in, you get no shares whatsoever in the IPO. And often banks do that to create this sort of scarcity of demand and to promote some buying of the stock in the aftermarket, which often leads to sort of big jumps in stock prices once they trade.

So the deal went very well on the face of it, but there were, I think, some hurdles that it had to get over during the wider book-build process, which we reported on, but no, I mean, the deal the deal went fantastically well. It's now trading up in the market, which is the best thing for an IPO. So VW got the result it wanted. The Porsche family got the result it wanted, and it traded up. So there's not much more you can ask for in this sort of market.

JULIE-ANNA NEEDHAM: Nice, and were there any investor concerns, such as Oliver Blume being the CEO of both Volkswagen and Porsche, such as the valuation. You mentioned the slight difficulty in benchmarking and comparing it, and also any concerns about Porsche's IPO going the same way that Aston Martin's went?

SAM KERR: So there were concerns, quite a few actually, among a lot of the institutional investors that we spoke to. The main one, actually, being that first point you brought up. The corporate governance. Oliver Blume being the CEO of both. And if you look at it, the shareholder structure itself. So Porsche only sold preferred non-voting shares as part of its IPO. So any investor that took part has no control over the direction of the company no matter the size that you bought in an IPO. You have no say whatsoever.

The entire effective control of the company actually does sit with the Porsche family. So they have a holding vehicle called Porsche SE, which is the controlling shareholder in VW, and also now a separate shareholder in Porsche. So through the controlling shareholding in VW, and the separate holding in Porsche, the Porsche family have complete control over the company itself.

And that's something that I think investors had to really wrap their heads around. Now, they certainly thought that the family had the best interests of the company at the heart. There is a real strategic value for the company to perform, and the family do want the company to absolutely perform. However, having sole control over the company does mean that investors are very much passengers to that process.

JULIE-ANNA NEEDHAM: Excuse the pun.

SAM KERR: Yeah, yeah, excuse the pun. Sorry, yeah, I mean, they're in the back seat rather than the front seat. But the Oliver Blume thing definitely was also a big concern because they are two very big jobs, if you think about it. VW itself has had, and we all know this, quite a few problems over the last few years. And to be the CEO of VW is, one would think, a pretty much 24-hour job.

If Porsche is going to be a truly independent unit and exist separately from its parent, you would think that the CEO of Porsche would have an equally demanding job. So does he have the ability to do both? I mean, that's the question, isn't it, that investors are going to want to hear the answer to. Because they are two now very big, separate, global brands that will exist on very separate trajectories. And obviously, there's a lot of talk about Porsche possibly entering Formula One.

The partnership that it was meant to strike with Red Bull did fall down, but that's something that we know Porsche has its eye on. It is a big brand in automotive motorsports and wants to continue on that. It's a very big, big name at Le Mans, and it's pushing ahead in luxury electrification, where it's going to be competing with the likes of Tesla and other luxury names who are building these electric vehicles. So Porsche has a lot on its plate, and you would think whoever is CEO is going to have to spend a lot of time thinking about all those things.

JULIE-ANNA NEEDHAM: And how concerned were investors about the Aston Martin comparison?

SAM KERR: I think once they got their heads around the fact that Porsche is going at a far greater discount to Ferrari they were OK about it. It does take a long time to forget Aston if you were an investor in that deal. I mean, we almost have complete share destruction from the point of IPO to where the stock is now. And the fact that the stock had to be reset several times, it's just completed a rights issue and has completely changed its shareholder structure over the last few years. It's almost a private company now, with the major holdings now sitting with Stroll who was the chairman CEO savior who came into to restructure the company.

Mercedes has a very big holding now. Obviously, Saudi's Sovereign Wealth Fund, PIF, has bought in the most recent rights issue. So Aston has had a complete transformation over the course of the past few years, and some would say to the positive.

But if you were an IPO investor in Aston Martin, and you're facing, basically, the loss of your entire investment, that's not much comfort that the company is at better track now. So yeah, I think if everyone had to get their heads around that, but I think once they saw the Porsche was being a lot more conservative than Aston was on those initial valuation thoughts, I think they were able to get their head around it quickly.

JULIE-ANNA NEEDHAM: But given the corporate governance, the lack of voting rights, the joint CEO, this history with Aston Martin being the last car company to list, why was the deal so popular?

SAM KERR: Well, I think there is some level of FOMO to what drives investors sometimes to these sort of transactions. If you look at the global IPO market-- sorry, the global equity markets and the EMEA equity markets, the STOXX 600, and everything else, you're pretty much sitting on portfolio losses across the board if you're an equity investor.

Now, one of the interesting things about the IPO market this year, despite the fact that we haven't had very much in Europe, and we've had a little bit in the Middle East, which has bumped up EMEA numbers, is the deals have pretty much performed OK. I mean, we're looking at-- I mean, around the time that we were writing about Porsche, we were looking at around an 11% positive performance for IPOs weighted across the board.

If you compare that to a double-digit loss in the STOXX 600, that's a very big benchmark advantage that you will get by investing in IPOs. And I think the idea was Porsche was going to be the largest. I mean, it is without a shadow of a doubt the largest IPO we're going to see in EMEA this year and possibly for a couple of years.

So it's, potentially, the largest single-stock investment you'll make in a name, and there's a chance for performance. So if you didn't take part in the deal, that would be an active decision that you would have to reflect on and possibly lose out on some performance versus your peers. So if you were confident that the company would trade up, and I have to say, all the strategic alignment for management was for it to trade up.

I mean, Porsche themselves, the Porsche family bought into the IPO at a premium to IPO price. So they wanted it to go up in the market afterwards. Investors were going to get some pretty big performance from it, and I think there's a certain appeal to owning Porsche in your portfolio as well.

JULIE-ANNA NEEDHAM: I think so. It is still seen as a luxury brand that people love, and as ECM editor for EMEA, you must have a pretty good idea of how the IPO market is likely to perform for the rest of the year. Do you expect to see more deals following in Porsche's footsteps?

SAM KERR: I think it's hard to say there won't be any deals. There's a few mid-cap companies, and a few IPOs in the several hundred million euro range where I think we could possibly see success where there's transactions that can-- well, effectively, you can build a book of fans even before you launch. But unfortunately, no, I don't think Porsche is going to herald a wave of new issuance.

And really, that's due to what we said at the top of the podcast. It's Porsche. It's the only name of its kind that was in the market. There's nothing close to its appeal, and I think if there were other candidates who have the same appeal as Porsche, yes, they would be able to come and be as popular and do as well. They just aren't those other candidates though, and the success of Porsche is not, I don't think, is a marker of a success for the whole IPO market. It is a market that a deal can get done, but it's certainly not a reopening of the market, as it were.

Does, however, it mean that if you were on the fence about an IPO as an issuer, you might be able to go ahead and think, well, if Porsche can do it, maybe I can. And possibly, I think it may make it so that there may be some conversations in boardrooms around possibly doing a listing this year because Porsche has been successful.

But I don't think it will herald the great wave, and the main reason for that is a lot of the problems with the IPO market this year and recent deals haven't come is nothing to do with investors. It's been sellers who don't want to accept the valuations that investors are willing to pay at the moment. And Porsche did take a big valuation cut to Ferrari, which if it were an aggressive seller, perhaps it wouldn't have done.

So I think if a seller is willing to take a big discount on what the initial expectations were for their IPO at the beginning of the year, then I think they have every chance, possibly, of listing and being successful. But, unfortunately, they are going to have to take a big discount to do a deal.

[MUSIC PLAYING]

JULIE-ANNA NEEDHAM: Right, Sam, we'll leave it there. Thanks very much.

SAM KERR: Thanks, Julie-Anne. Thanks very much for having me.

JULIE-ANNA NEEDHAM: That was Sam Kerr, senior ECM editor in EMEA for Ion Analytics. Thanks for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, have a look at our show notes. Join us next week for another episode.

[MUSIC PLAYING]