Buoyant European block trades lift IPO outlook

Success for banks selling large blocks of stock in the European market this year points to a supportive environment for new listings in the months ahead, bankers say.

There have been 70 such accelerated offerings so far this year according to Dealogic, worth €11.3bn, more than double the €5.5bn sold in the same period a year ago when anxiety about the state of China’s economy prompted much capital markets activity to cease.

While initial public offerings take months to launch, a “block trade” can happen in a matter of hours, with investment banks typically bidding for a block of shares at a discount and then selling them on to the market. The instant response can offer a gauge of the market mood.

Block trades tend to follow initial public offerings, as shareholders such as governments, early investors or private equity groups pick opportune moments to sell into a market established by the initial listing.

“All of the factors which have helpful for the block trade market are likely to be helpful for the IPO market as well,” said François-Olivier Mercier, head of block trades in Europe the Middle East and Africa for UBS.

All of the factors which have helpful for the block trade market are likely to be helpful for the IPO market as well

He pointed to low levels of market volatility in Europe, elevated cash holdings in investors’ portfolios, the attraction of shares sold at discount to the market price following other share sales, and double-digit gains for many of the continent’s share indices in a three month rally that has continued into 2017.

“There has been a lot of pent-up demand for equity,” said one banker, who highlighted rising share prices that have followed some block trades — for instance, the sale of €650m of shares in Philips Lighting, the bulb maker spun out of the Dutch conglomerate Philips last year.

Shares in the group jumped 4 per cent between the close of trading on February 8 and the market opening the following morning.

However, the banker said the frequency of block trades reflected a normal level of activity, rather than a flood of share sales. The volume so far this year is similar to the €12bn of block trades in the same period in 2013 and 2015, but well below the €22bn total in 2015, on Dealogic data.

The largest block trade this year was a sale by the French government of €1.2bn of stock in Engie, the power and gas company formerly known as GDF Suez.

Private equity groups have also been active, with follow-on trades in Flow Traders, the Dutch-listed group that specialises in exchange traded funds, and Worldpay, the UK-listed payments provider.

Mr Mercier also pointed to increased merger and acquisition activity, with around 15 per cent of block trade volumes sales being of new stock by companies seeking to raise capital, a process known in the UK as a “cash box placing” used as an alternative to a rights issue.