In Europe, Mounting Debt May Push Companies to Public Markets

February 18, 2013 LONDON — The steady revival in European stocks is offering hope to the region’s highly indebted companies seeking to raise money on the public markets.

As concerns about the fate of the euro zone wane, European companies are considering public stock offerings as part of broader plan to pay down debt and bolster profit.

The deals cannot come soon enough. The Continent’s corporate sector has a combined $430 billion of debt coming due by end of 2014, according to figures from the ratings agency Standard & Poor’s, making many companies eager to find ways of unburdening their balance sheets.

“We will see more I.P.O. activity,” said Mark Hughes, a capital markets partner at the accounting firm PricewaterhouseCoopers in London. “For corporate spinoffs, the rise in European equities has made new listings a realistic option again.”

Much of the recent efforts have involved companies seeking to raise billions of dollars by spinning off assets — in essence, “carving out” profitable business units to unlock their value. The money raised is being used to help repay large debt loads, restock cash reserves and revamp operations after shedding unwanted assets.

For instance, the Royal Bank of Scotland raised $1.3 billion late last year by selling a 30 percent holding in its insurance unit, Direct Line. The Spanish telecommunications giant Telefónica also has pocketed 1.5 billion euros, or $2 billion, by selling a stake in its German subsidiary Telefónica Deutschland in October, Europe’s largest initial public offering of 2012. The offering was so successful that Telefónica has shelved plans to list its Latin American subsidiary.

The hospitable atmosphere is a stark contrast to just a few years ago, when fears about the future of Europe reached fever pitch. At the time, investors jettisoned stock, fearing that the debt crisis would hamstring the Continent’s corporate sector.

Now, however, Europe’s equity markets have rebounded and many indexes are trading at levels not seen since 2009. The FTSE 100, the leading British index, has risen 79 percent over the last three years, while the German benchmark DAX index has more than doubled in value over the same period.

But several analysts caution that European companies are testing the markets at a time when investors are still skittish, and the strategy of raising money through the public markets could backfire in some cases. Short-term concerns about the sluggish economy in some regions, particularly indebted southern European countries, may reduce investor enthusiasm.

Bankers say that companies also continue to demand high valuations on potential spinoffs, though investors are still unwilling to pay large premiums on European listings that are still at risk from the region’s anemic growth. As a result, the pricing levels of potential I.P.O.’s are gradually falling.

And investor confidence in the success of I.P.O.’s remains shaky after the amount of money raised through European offerings fell 58 percent, to $16.5 billion, last year from the year before, according to the data provider Dealogic.

But European companies are facing critical pressures to make such moves. As the financial crisis enters its sixth year, corporations have a wall of debt that must be repaid by 2014. While many firms have tried to raise money by selling noncore assets to rivals or private equity buyers, the Continent’s mergers and acquisitions market remains subdued despite the recent pickup of activity in global deals.

Last year, European deal activity fell 14 percent, to $697 billion, compared with 2011, according to Dealogic. The total was the lowest figure since 2003.

Through mid-February, European deal activity has fallen 48 percent, to $45.4 billion, compared with the previous period in 2012, according to the data provider Thomson Reuters. In contrast, takeover activity in the United States has jumped 140 percent, to $159.3 billion, over the same period.

Analysts say sellers are still demanding high prices for unwanted businesses, despite the economic slowdown. Faced with uncertainty about the global economy, buyers looking at European assets also are cautious about spending money that they may need to either bolster their own operations or return to nervous investors if the global financial markets again take a turn for the worse.

“A lack of confidence is holding back the M.& A. market,” said Dominic Morris, a partner at the law firm Allen & Overy in London.

The problems aren’t concentrated at blue-chip companies, like Siemens and Volkswagen, which operate from a healthy economy and are able to tap debt markets to meet their financing needs. Smaller firms and those from struggling industries like retail or construction will be forced to rely more heavily on new stock issuances and spinoffs to raise the cash, analysts said.

“Vulnerable companies are still going to have refinancing issues over the next two years,” said Paul Watters, head of corporate credit research at Standard & Poor’s in London. “They will have to look at other avenues, such as carving out or selling noncore assets.”

To raise money, companies are already positioning themselves to hold secondary offerings to take advantage of bullish equity markets. So far this year, the steel giant ArcelorMittal, which has been hit by falling commodity prices linked to a slowdown in Asian markets, said it would issue $3.5 billion of new shares in a bid to reduce its $22 billion of debt.

Grupo Santander, the euro zone’s largest bank by market capitalization, also said it may list its consumer finance business in the United States later this year after the Spanish bank raised around $4 billion from the I.P.O. of its Mexican subsidiary in September.

“European companies are sitting on a number of large assets,” said Maria Pinelli, global vice chairwoman of strategic growth markets at the accounting firm Ernst & Young in London. “Carve-outs can free up cash to repay debt or be used for future investment.”

The renewed effort to offload assets through I.P.O.’s has not been limited to Europe. On Jan. 31, Pfizer raised $2.2 billion by taking its animal-medicine unit public. The listing was the largest I.P.O. from an American company since Facebook’s beleaguered $16 billion offering in May.

While new offerings could help replenish companies’ coffers, the listings also may provide investors with a new source of returns. Over the last three years, investors had pulled back from European equities in large part because of the sovereign debt crisis.

Instead, pension funds and other institutional investors flooded into the debt markets, whose returns — or yield — have plummeted as demand for new issuances far outstripped supply. Faced with investors clamoring for bonds, companies, even those in struggling industries like manufacturing, have been able to sell billions of dollars of new bonds with increasingly low yields.

In search of profits, analysts say, investors are prepared to take greater risks in European stock markets, including backing new offerings. To secure returns, they are hoping that the worst of the euro zone’s problems are behind it.

“Investors are trying to find yield,” said Klaus Hessberger, co-head of European equity capital markets at JPMorgan Chase in London. “For carve-outs to succeed, the market needs to be stable.”