Kabel Deutschland – will it perform?

Cable networks operator Kabel Deutschland, which was 88% owned by Providence Equity Partners, raised €759m in the €5bn listing, making it the largest IPO in Germany since Hamburg Harbour listed in November 2007.

With several German IPO candidates hoping to follow suit, the results of the Kabel Deutschland flotation are being followed closely. All this comes in the wake of a series of cancelled European IPOs including New Look, Travelport and Merlin. One company that no doubt is watching the performance of Kabel is chemicals distributor Brenntag, which many expect to list in the near future.

Yet, companies and their investors should take heed, as Kabel Deutschland is not necessarily indicative of a successful IPO trend: "One IPO alone is not enough to be able to speak about a turn-around of the situation," comments Sascha Pfeiffer, managing partner at Close Brothers.

He continues: "Even though it is very difficult to tell based on a single IPO, this is hardly the ice-breaker that some interpretations suggest. The fundamental data remains the same – the markets are flooded with incredibly cheap money seeking opportunities. If there are three or four more IPOs and, most importantly, those companies perform well, then it is time to speak of a sea-change, but I'm not seeing one at present."

Indeed, to lure investors to private equity-backed flotations, the IPOs must first prove themselves. Kabel's shares were initially priced at €22.00, were trading at €22.50 this morning, but fell throughout the day to €22.22 at closing. The downward slide of Kabel's share price this afternoon raises core questions about the business and its hopeful peers. Will these companies perform to expectations?

The current slew of potential IPOs are being prepared largely to open up exit routes for private equity owners. Despite a recent flurry of examples, the SBO route remains largely closed due to the difficulty in financing large transactions. Therefore, private equity firms are now attempting to cash out on the public markets, or, as one industry insider put it, "aim for an LBO via IPO".

How attractive these companies actually are for institutional investors is another question. Invariably, these businesses are packed full of debt and Kabel's pricing has been called "astonishingly expensive" by industry insiders as it was priced at 6.85x EBITDA. Although currently trading at par, it remains to be seen if the share will stay above offer price. Typical of an infrastructure investment, Kabel Deutschland has a strong, steady cashflow, but its growth course is perhaps too flat to spark real excitement.

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• Topics
• DACH
• Investments
• Germany
• Flotation