Back when Spotify Technology SA was only a few years old, I visited the cramped offices of French music startup Believe SA, which had the promising pitch of one day becoming a digital record label for the streaming era. The bet paid off: The company listed on the Paris stock market a decade later in 2021 at a €1.9 billion ($2 billion) valuation, and was hailed by the French government as an example of how its tech scene could hold its own against the likes of the US.
Only three years on, the story is nearing a sorry end. Believe’s co-founder Denis Ladegaillerie is moving to take the company private, with the backing of investment funds EQT AB and TCV, at €15 a share, or approximately 23 percent below its initial public offering (IPO). The scale of the stock’s
underperformance stands out — as low as that bid looks, it’s almost 30 percent above where the stock was a week ago. So does the speed at which Ladegaillerie and his fellow insiders (representing about 70 percent of the share capital) are looking to whisk the company away from the harsh glare of the public markets. Believe hasn’t even reached the end of its 2022-2025 IPO-funded growth plan.
What happens next will be a key test of minority shareholders’ ability to push for a better offer. Believe’s current share price, which is close to the proposed bid, implies a lower valuation multiple in terms of sales and underlying earnings than rival Universal Music Group NV, according to Bloomberg data.
But this story goes well beyond French tech startups. It highlights Europe’s complex struggle to revive its beleaguered stock markets in the face of anemic IPOs, weak performance and mounting delistings.
After all, Believe is only one of many European firms facing a “take-private” offer — the founding family of Tod’s SpA is teaming up with buyout firm L Catterton to buy and delist the luxury shoemaker for a pretty skinny price, for example. Some IPOs now look like a source of impatient capital. The above chart, compiling recent take-private bids, courtesy of Amundsen Investment Management, shows that the average time spent as a public company before such a bid is about two years — one extreme being nine months — and the average bid premium versus the IPO price is a wafer-thin 3.6 percent.
What really screams out here is the poor performance of European IPOs, which is at the root of why bidders are so quick to swoop. While blue-chip companies like LVMH Moet Hennessy Louis Vuitton SE or Novo Nordisk A/S (both part of Goldman Sachs Group Inc’s GRANOLAS list) are getting bigger, the small are withering. The average performance of an IPO over the past four years has been a drop of around 10 percent in Germany and a whopping 37 percent fall in France. Companies may be hitting the market overvalued, but the speed of their declines also means they may be leaving the market undervalued, allowing a well-timed takeover to capture all the upside.
The macroeconomic environment may be exacerbating these trends —
higher interest rates tend to hurt risk appetite, especially of the moonshot variety — but so are structural issues like skimpy analyst coverage of small companies and weak retail participation in Europe’s stock markets, according to Jean-Mickael dos Santos, fund manager at Pure Capital SA in Luxembourg. (His fund owns shares of Believe and is considering taking part in the proposed offer.)
And, ironically enough, recent efforts to make the stock market more attractive by weakening the ability of minority investors to block public-to-private deals may also be contributing. European firms have a relatively concentrated shareholder base and limited free float when compared with US counterparts, meaning minority shareholders find themselves with little alternative but to accept an insider-backed takeover when it comes.
There’ll be no memestock revolution here: Pleading is sometimes the only option, as my colleague Chris Hughes has written.
Hopefully investors at the likes of Tod’s and Believe will be able to shake a better offer out of bidders. But the likelihood is that more companies are going to leave the stock market, and their new owners may simply wait a few years before taking them public again — in the US.
It’s time to renew efforts to widen retail participation in Europe’s stock markets and fine-tune regulation to attract more investment in Europe
without weakening minorities’ grip in the process. Two years shouldn’t feel like an IPO lifetime.
Lionel Laurent is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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