Esprit Holdings û the Hong Kong-based global apparel company û has announced that it has postponed the IPO of its European operations û Esprit Europe. The share sale was supposed to be launched today on the Frankfurt Stock Exchange but the company decided to pull the plug at the very last minute. The questions on everyoneÆs lips is æwhy?Æ
The official version is that volatility in the global markets, in particular the volatility in shares in similar apparel companies as Esprit, makes it very difficult to price the deal with any accuracy. John Poon, CFO of Esprit Holdings, said in the announcement of the postponement: öWe will monitor the conditions in the apparel sector for a possible relaunch of the proposed spin-off in year 2000.ö
However, this explanation seems rather glib. In truth, it was probable that the deal did not meet its primary objective û which was to create a lot of shareholder interest in Esprit Europe. Esprit as a company and a brand is extremely popular in Europe, with 69% of the companyÆs global sales coming from Germany alone. This dwarfs the demand for Esprit goods in Asia. Therefore the company felt that as so much of its value derived from its European operations then the company should be listed in Europe.
However, this did not go according to plan. Goldman Sachs, as global book runner of the deal, apparently managed to get the book oversubscribed û not by multiples, but by percents. And yet it was Goldman which officially advised Esprit to postpone the deal. According to a spokesperson for Goldman, even though the book was oversubscribed, there was not enough interest in the stock to guarantee a vibrant aftermarket.
Financial irrelevance
Yet even this explanation is a little thin. Esprit Europe would be a listed subsidiary of Esprit Holdings, which is already listed in Hong Kong. Movement in one would reflect movement in the other counter. There would not be any huge price mismatches û you can count on the arbitragers these days to work globally. And there would be no need for a second round of finance for a long time, as Esprit Europe would be in a strong net cash position.
All in all it seems rather fishy. If the postponement was truly in the interests of investors, then why wait right until the day of launch to pull the deal? Surely they had seen how much demand there was for some time. That is what Goldman is so good at û reading the market for new issues.
The fact is that the story just did not seem to excite investors enough. Demand was weak, when Esprit felt it should have been strong. In halting the deal, Esprit acted in its own best interests by keeping the company intact. By selling off a subsidiary into an uninterested market, it could have doomed itself to financial irrelevance. There may have been a touch of hubris about the decision but one can sympathize with a company that is the third most recognized brand in Germany which then struggles to raise a mere $200 million. There is no glory in going public just for the sake of it.
The decision was not so much a victory for investor relations, but it was certainly a victory for shareholder value. By retaining its European operations under its Asian ownership, shareholders in Esprit in Hong Kong will be the real beneficiaries. I wonder how long it will be before Goldman manages to prise the deal out of Esprit again and return to the market? After all, they have the roadshow expenses to think about. Remember, no deal, no dough.
