Analysis: Yell float raises hopes of recovery

This week sees the City gorge itself on the biggest float in two years, as directories business Yell goes public. It's too early to predict the return of the boom times, but Andy Allen detects a mood of cautious optimism

City PROs know full well that, as far as IPOs go, one swallow doesn't make a summer. But at the same time it has been hard for some not to feel that the prospect of directories business Yell's long-delayed flotation finally coming to pass may be a harbinger of warmer times ahead.

This, after all, is the company that shelved its IPO exactly a year ago because of poor market conditions. For financial PR - a sector steeped in gloom since the second half of 2001 - that decision added insult to an already injurious economic climate.

A successful flotation for Yell could certainly spread some much- needed sunshine around the City. Its decision to float this week, with a valuation of around £2bn, makes it the biggest share issue since insurer Friends Provident went public in July 2001.

Despite this, many analysts are warning that we shouldn't read too much into this particular IPO. While some are enthusiastic, others see it merely as the company seizing the most fortuitous moment to go to the public since it abandoned its previous flotation plans. That doesn't make it necessarily a good time for other companies to follow suit, they say.

And despite headlines suggesting Yell will pay a massive £100m in float fees, around £70m will go on costs, such as refinancing of debts, leaving a more reasonable £30m to be shared between the various advisers involved, including PR consultants Citigate Dewe Rogerson.

This fails to impress one City PRO, who claims he hasn't actually been paying that much attention to it all. 'It's not as if Yell ever went away,' he says. 'Let's wait and see how the markets are by the second half of this year.'

In some respects, overall levels of activity seem to warrant that caution.

Statistics from City information data-base firm Zephyr show that in the 12 months to the start of June 2003 there were 29 flotations. While the amount seems almost promising at face value, the bulk of these were small capitalisation deals, and the total amount raised amounts to less than £2bn. To put that into context, Yell will achieve that valuation on its own.

Even more ominously, the bulk of those IPOs took place in the second half of last year, according to figures recently released by Thomson Financial.

Pickings from those few sporadic IPOs were spread fairly evenly among the big boys of financial PR. Only Finsbury and Buchanan managed to corner as many as three of the deals on offer. Binns & Co, Tavistock, College Hill and Brunswick bagged two apiece.

Yet, while few in the the financial PR community want to get too enthusiastic about a single flotation and open themselves to charges of naivety or hype, there is an increasing sense that a turnaround may be near.

'There are a lot of people talking about deal activity in a way that would have got you laughed out of court six months ago,' says one City PRO. 'Now you can have discussions on this subject without people thinking you're out of your mind.'

Communications director for the British Venture Capital Association (BVCA) Mark Fox says a newly published survey among its members shows a 'marked increase in confidence in business conditions over the next three months'.

'There's a sense of anticipation around this IPO,' says Hudson Sandler CEO Alistair Mackinnon-Musson. What makes it interesting, he adds, is that Yell's plans follow hot on the heels of another successful flotation - that of insurance broker Benfield, which made its share debut only three weeks ago.

While one healthy IPO may not be too significant, two might be the start of a trend. 'Two swallows can make a summer,' says Mackinnon-Musson.

An important factor in any revival, he believes, would be the reaction of the private equity houses. The fact that Yell is being floated by venture capitalist backers could be significant, because many VCs operate on a three-to-five-year investment cycle - at the end of which they need an exit strategy in order to invest elsewhere and keep their books turning over.

Significantly, those that invested in the boom years of the late 1990s, will be seeing the end of that cycle arriving around now, and will be looking for a way to realise their investments. Of course they have other options than IPOs, but, traditionally, public offerings have led to relatively high valuations. An initial movement could lead to gathering momentum if VCs jump on board.

Besides, venture capitalists could be important in other ways for PR agencies. Anecdotal evidence around the City has it that certain firms are strengthening ties with private equity houses as clients, in the hope that once the IPO market returns to full swing, they will choose those agencies to handle floats from within their equity holdings.

If so, says Fox, they are probably mistaken. VCs - a notoriously hard-headed breed - are particularly given to cut to the chase and are unlikely to let such factors sway their opinions, he believes. Another City PRO also dismisses that theory, saying IPOs are so rare it's hardly worth the bother.

Yet others, including, Mackinnon-Musson - whose firm counts a large number of VCs among its clients - are not so sure. While it would be over-optimistic to assume that an established relationship with a private equity house gives an agency much of a head start in this respect, 'it can't do any harm can it?,' he asks.

SLIM PICKINGS 12 MONTHS IN THE CITY

Ranking Financial PR Company No of IPOs Value pounds m

1 Gavin Anderson & Company 1 1066.5

2 Finsbury 3 313.2

3 Financial Dynamics 1 175.9

4 Citigate Dewe Rogerson 1 51.7

5 Buchanan Communications 3 15.9

6 Haggie Financial 1 9.5

7 Bankside Consultants 1 7.1

8 Binns & Co Public Relations 2 4.8

9 Tavistock Communications 2 3.6

10 ING Media 1 2.1

Source: Bureau van Dijk - ZEPHYR

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