WE Soda’s failure to launch is no big deal for London

Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts, an expert witness firm specialising in financial services.

Rejection! WE Soda, the world’s leading producer of soda ash, has postponed is IPO. The much ballyhooed listing was expected to give a big “boost” to a self-doubting City afflicted with the multiple plagues of deal drought, job cuts, Brexit, and delistings.

But the boost has turned to bust, and now comes the fallout and finger-pointing.

We report elsewhere that the IPO’s failure is a “fresh blow to [the] City”, while The Daily Mail said that “Britain’s stock market suffered a fresh blow”. It’s “a huge blow,” according to the Evening Standard. It’s “another blow to the City’s capital markets”, wrote Financial News. Bloomberg called it “another blow to the UK market”…. OK you get the point.

I beg to differ. The conventional wisdom is long on convention and short on wisdom. The deal foundered over a legitimate disagreement over valuation. Its failure is no big deal and no cause for self-flagellation.

On paper, the WE Soda IPO should have been a blowout (no pun intended). WE Soda is no corporate canine; it has strong growth, 60 per cent ebitda margins (cowabunga!) and 80 per cent cash conversion. Its ESG scores were best-in-class (even if those ratings warrant scepticism). It also promised a chunky dividend yield. The CEO — a former senior investment banker whom I used to compete against — has flair and intelligence, and the IPO underwriting syndicate boasted the most credentialed players, including JPMorgan and Goldman Sachs among the global coordinators.

In sum, WE Soda excelled in growth, margins, cash, dividends, ESG, management, underwriting syndicate . . . This deal seemed almost custom-built for success.

So why did it fail?

Management blames “extreme investor caution”. Under this version, WE Soda wasn’t looking for an excessively high valuation; it was just, as P!nk might sing, “m!sundaztood”.

But another way of looking at it is this: WE Soda, a de facto Turkish company with no public record, was trying to list at a peak multiple off peak earnings resulting from peak prices for soda ash. Investors were having none of it.

WE Soda was reportedly seeking a valuation of 7-10 times forward EV/ebitda. But peer companies such as Solvay and other commodities players are trading at around 5 times. Management argued strenuously that WE Soda’s superior financial and operating metrics warranted a premium to these names. But investors are familiar with the listed peers and can assess their performance over many years. Moreover, in many cases the peers don’t have the country risk associated with having all current production assets in Turkey.

Indeed, investors were closer to 4-5x, with one of the most active US-based investors in the new issue market telling me (post-cancellation) that they had been closer to 3-4x.

WE Soda reportedly tried to guide investors towards dividend yield. By promising a minimum $500mn dividend for 2023, the company was in effect committing to an over 9 per cent yield from the outset, assuming an enterprise value of around $7bn. That seems a solid valuation floor!

But with very few exceptions (such as certain regulated utilities) institutional investors don’t value companies based on dividend yield, at least not as a primary metric. And in a higher interest rate environment, dividend yield resonates less with investors than it used to.

In effect, WE Soda was expecting a minimum enterprise value of $7bn, but the market was below $5bn. That gap was too large to bridge. Coupled with a relatively large deal size of $800mn, WE Soda and its underwriters had no leverage to force investors to move up their initial price indications.

Investors did the work: the underwriters reportedly gathered over 800 pieces of investor feedback from over 300 unique investors, of which around half were from outside the UK. Every institution I’ve spoken to has told me they had taken the time to study the research and presentations. They all liked the company, but not anywhere close to the levels expected by WE Soda’s owner.

Overall, then, the deal failed for the most conventional reasons: it was too expensive and the deal was too big. I’m not sure why WE Soda and the underwriters decided to announce an intention to float (ITF) when they appear to have had little visibility on investor demand. Presumably, they thought the ITF would oblige investors to show their true hand. Or maybe they had invested so much time and money and emotion that there was no turning back.

It was a calculated risk, and it didn’t pay off. This happens.

Last week, I wrote that the WE Soda IPO “is not a litmus test for the London market.” In retrospect, it seems absurd for City champions to have invested so much hope in this IPO. The hype and hope seemed excessive even then. This deal was never going to test the UK market’s willingness to embrace new technologies. It said little about the willingness of investors to pay up for future growth. It just confirmed London as the venue of choice for emerging market issuers that have nowhere better to list their stock. And WE Soda’s IPO would likely have fared no better in Amsterdam or New York.

WE Soda’s aborted IPO is a disappointment for its owner and its management. It also reminds us that it’s easier for investment banks to pitch a premium valuation than it is to achieve one at IPO. But that’s as far as it goes. It’s time to accept that deals fail even on the best exchanges, and London is still one of the world’s best.