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Formula One, which was expected to kick off the management roadshow and institutional bookbuilding for a $2.5 billion to $3 billion IPO tomorrow, has decided to delay the launch due to the current poor market environment, sources said on Friday.
The delay, which was communicated to investors just one day after Graff Diamonds decided to pull its $1 billion initial public offering in Hong Kong due to insufficient demand, is further evidence of how precarious the equity capital markets have become. According to bankers, investors are asking for significantly wider discounts than they would normally do as they worry about the risks related to the upcoming Greek election, which could trigger the country’s exit from the eurozone, as well as weak economic data.
On Friday, the Dow Jones index plummeted 2.2% after data showed that the US economy created far fewer jobs than expected in May. Hong Kong’s Hang Seng Index has lost 12.9% since May 2, erasing almost all its gains so far this year and Singapore’s Strait Times Index has fallen 8.6% in the same period.
Sources said that the bookrunners will continue the investor education of Formula One for the time being in the hope that there will be a window to launch in the near-term. They stressed that the deal is not being pulled and said comments by Formula One CEO Bernie Ecclestone suggesting that the deal may not happen until later this year are exaggerated.
“All we are doing is adding a few days to the middle of the roadshow,” said one banker working on the IPO, while others noted that investors are still interested in meeting with the company.
It is unclear whether there is a discrepancy between what investors are willing to pay for the Formula One shares and the valuation that the selling shareholders are targeting, but in any case it is hard to argue that it would be in the company’s best interest to launch the deal right now as share prices are continuing to tumble all around.
“If you go now, you take the risk that things may be getting really ugly,” one source said, noting that there is a lot of market risk for investors buying into IPOs in Hong Kong and Singapore since there is an entire week between the pricing of the deals and the trading debut.
And since Formula One hasn’t yet launched the institutional bookbuilding or lodged the prospectus with the Singapore regulators, it has the option to wait.
Most of Formula One’s revenue stream and costs are based on contracts – with the countries organising the races, with the team and race sponsors, with the teams themselves and the broadcasting media – which means the company offers high visibility on its earnings for the next two to three years and should be quite a defensive stock. However, sources say investors are not interested in taking on any form of exposure at the moment.
The owners haven’t yet determined what proportion of the company will be put up for sale, but only about $400 million is likely to come from the sale of new shares. The majority of the deal will be made up of secondary shares.
A key portion of the shares will come from the administrators of the Lehman Brothers bankruptcy which own about 15% and will be selling their entire stake. A number of smaller owners are also expected to sell and controlling shareholder CVC Capital Partners may reduce its current holdings further. The private equity firm has already trimmed its stake from 63.4% to just over 42% this year by selling non-voting securities through pre-IPO placements to three investors, and according to sources it intends to retain at least 30% of the company.
The three pre-IPO investors – US asset management firm Waddell & Reed, Blackrock and Norges Bank Investment Management, which manages a fund that is in charge of investing Norway’s oil revenues – have invested a combined $1.6 billion at a price that gives Formula One an enterprise value of about $9.1 billion ($7.2 billion of equity and $1.9 billion of debt).
Goldman Sachs, Morgan Stanley and UBS are joint global coordinators and bookrunners for the IPO, while CIMB, DBS and Banco Santander are joint bookrunners.
