Following the issuing of the Prospectus, which is published on both the regulators and the Company’s website, the public offer period begins and the order book to collect orders from the institutional investors opens. which normally takes between 2 and 3 weeks.
The Management roadshow refers to a series of sales presentations pitched by the Company’s top executives together with the Financial Advisor(s) to a wide range of potential institutional investors, allowing them to have a closer contact with the Company.
Roadshow events are key to the level of participation in an IPO and are held across different locations, at a national and international level, which are pre-selected according to the criteria they belief target investors will value the most.
The goal is to present the Company’s key executives and its strategic vision to investors and lead them to participate in the IPO. During this phase, Management will present the Company’s strengths and growth perspectives, and address concerns expressed by investors and analysts during the previous stages.
Among the wide number of aspects that the Management presentations on roadshow events, usually the following ones are always present:
► The background and history of the Company;
► Information about the top executives of the Company;
► Strategic Plan;
► Business Plan;
► Investment Plan;
► Historical financial performance analysis;
► IPO rationale and intended goals.
Traditionally roadshows are held in a format of live meetings that take place in physical venues, but in the last years it is becoming more and more common to hold part of the roadshow presentations online through online videos and podcasts. At the end of each session there is always a Q&A session where investors’ representatives have the freedom to ask general questions about the Company and the IPO process.
Opening of the order book
When the public offer period starts and the Management roadshow targeted to potential institutional investors begins, the financial advisor(s) opens the order book and starts receiving preliminary bidding orders from these investors, which will include the number of shares they wish to acquire and the price they are willing to pay within the pre-defined range, if the bookbuilding method is used for the IPO price definition.
Different techniques are used to determine the fair value of the Company’s equity. The main models for valuing the Company are the income approach and the market approach.
The income approach determines the value of the Company based on future cash-flows that the business is expected to generate, discounted at a discount rate which represents the opportunity cost of capital, whether using a dividend discount model or a discounted cash flow model.
The market approach values the Company based on trading multiples derived from publicly traded companies that are comparable to the Company – Guideline Public Company Valuation Method. Ideally, the guideline comparable public companies selected for analysis compete in the same industry but when such publicly-traded companies do not exist (or when only a small number of them exist), other companies with similar underlying characteristics such as markets serviced, growth, risks or other relevant factors can be considered. Exact comparability is not required under this method of valuation, although closer comparables are preferred.
***Guideline Public Company Valuation Method***
The Guideline Public Company Valuation Method consists on identifying comparable public companies (peers), adjusting the guideline public company multiples for differences in the size and risk of these companies compared to the Company, and then applying the adjusted pricing multiples from the representative companies.
No model is more reliable than the other and in some cases the valuation can be performed by considering a combination of different models. Issuers are advised to indicate the valuation method(s) used in the Prospectus.
On the basis of this valuation, and also taking into account the market sentiment that was collected in the early looking meetings with investors, a fixed price or price range will be determined.
Price determination / Bookbuilding
The price of shares in an IPO can be determined through the fixed price method, bookbuilding method or a combination of both.
The main distinction between the fixed price method and the bookbuilding method is the relation between the Offer price and demand for the Offer:
► Fixed price method – The number of available securities and the Offer price of the securities is known in advance. Allocation of securities if investors demand exceeds the number of shares being offered, is made on a pro-rata basis;
► Bookbuilding method – Being a price discovery mechanism, investors are presented with a range of acceptable prices and invited to bid for the acquisition of a certain number of shares and state at the price they are willing to pay. The final price is then set by the Company because of the level of demand and allocation of securities is discretionary.
The most common market practise is to set a price range before the start of the offering period and collection of bids and (i) reserve a tranche of shares to the public offering where investors do not participate in the price-setting process and give orders of acceptance considering that the final offer price may be set in the highest range and (ii) reserve the other tranche of shares to the private offering to institutional investors offer where the bookbuilding method is used to set the price and allocate shares to institutional investors.
The principle of fair and equal treatment of investors applies to all offers, i.e. final offer price must be the same for retail and institutional investors. Nonetheless, the PSC provides an exception for this rule to members of the Company’s staff, who may acquire shares at a limited discount if the Company decides to grant them that benefit.
As soon as the final offer price and the final number of securities offered are determined, these must be notified to the CMVM and disclosed to the public.
Placement of the Offering
Investors targeted by the Offering
The description of the offer as a whole must be set out in the Prospectus, with a clear definition of the breakdown of the offer between investor types. It is common that the offer includes two types, namely a Public Offering directed to qualified and non-qualified investors, and a private offer directed exclusively to Institutional Investors.
There is a number of reasons that may justify having the two types (public and private) in the same offer simultaneously:
► Having shareholders with different profiles and investing objectives promotes smooth development of the share price;
► Liquidity is enhanced by having a significant volume of orders in opposite directions;
► A diversified investor base promotes balance between supply and demand, which functions as an inhibitor of high volatility.
Additionally, if Issuers wish to offer their employees the opportunity to subscribe for Company shares at the time of their IPO (usually at a discount), in order to promote employee ownership in parallel with the IPO process, they can do so.
The Company may consider reserving or prioritizing all or part of the offer for one of these categories of investors (institutional investors, retail investors and the Company’s employees). In this case, the Company shall ensure that it clearly indicates that intention in the Prospectus and in promotional communications. Regarding the allocation of part of the offer to specific typologies of investors, it is common to put in place clawback provisions to add flexibility to the Offer which establish that, depending on investors’ demand during the offer period, the Company can re-assign a small percentage of shares from one tranche to another.
When no distinction is made between different categories of investors and/or no allotment is reserved for a specific category of investors in a Public Offering, the Issuer and, where applicable, the members of the placement/underwriting syndicate, must ensure that the Public Offering is effectively open to all investors on the same terms and conditions without distinction or discrimination and that the shares are allocated in an equitable manner.
Similarly, the conditions offered in the retail tranche in the case of a Public Offering of shares must be identical to those offered in the tranche reserved for institutional investors. Moreover, intermediaries are legally obliged to ensure fair treatment of their (different categories of) clients in order to meet the demands of different investors in a meaningful way.
The length of the period during which shares are offered to the public varies greatly from one transaction to another and usually ranges from around 2 to 3 weeks. The offering period starts on the day following the approval of the Prospectus by the financial markets regulator and its publication and it may be extended depending on the success of the subscriptions and market conditions.
Acceptance of the Offer
The investor’s statement of acceptance of the public offering is done by an order addressed to any financial intermediary legally authorized to render the service of the reception, transmission or execution of orders on third party’s behalf. Such acceptance may be revoked up to five days before the end of the offer period, or within a shorter timeframe, whenever stated in the Prospectus.
Acceptance orders placed by investors may take several forms, including:
► Limit orders: a fixed number of shares with a price limit above which the investor will not take part in the IPO;
► No limit orders: a fixed number of shares irrespective of the final IPO price;
► Orders where investors define the number of shares to be purchased at various price levels;
► Orders where investors define the amount for which they will purchase shares, independently of the final price, in which case the number of shares purchased at various price levels is not defined.
Modification or Revision of the Offer
The offer contents may only be modified, within a reasonable period and subject to the CMVM’s authorisation, in case of an increase of the offer risks due to an unforeseen and substantial change of the circumstances upon which, as known by investors, the decision to launch the offer is based.
Moreover, until two days before the end of the offer period and subject to the CMVM’s authorisation, the offeror may review the terms and conditions of the offer, provided they are not less favourable, in global terms, to investors.
What are the effects of the offer revision?
► Modifications to the offer may lead to extensions of the respective time periods, decided upon by the CMVM either on its own initiative or at the request of the offeror.
► Statements of offer acceptance prior to amendment are considered effective for the modified offer. Nonetheless, the referred acceptance can be revoked.
► The amendment should be immediately disclosed by the same means used for the prospectus disclosure.
Revocation and Withdrawal of the Offer
In case of change of circumstances, the offeror may, instead of modification, revoke the offer, subject to the CMVM’s authorisation.
Whenever the CMVM identified that the offer contains any irreversible illegality or breach of regulation, the CMVM will order the offer’s withdrawal.
The revocation and the withdrawal of the offer are published by CMVM, at the offeror’s expense, by the same means used to disclose the prospectus.
The revocation and withdrawal of the offer determines the ineffectiveness of the offer and of the acts of acceptance prior or subsequent to the revocation or withdrawal and whatever has been delivered must be returned.
The CMVM will suspend the offer when any reparable illegality or violation of regulation is discovered. The defects that caused suspension need to be corrected in maximum 10 working days. Afterwards, if no correction is made, CMVM will order the offer’s withdrawal.
If the offer is suspended, the addressees of the offer may withdraw their statements until the fifth day following suspension, having the right to restitution.
Allocation of shares
The allocation of shares in the Public Offering determines the number of shares allocated to (each class of) investors that have accepted the Public Offering. In accordance with the principle of fair and equal treatment of investors, the Company and/or selling shareholders will ensure, in consultation with the members of the placing/underwriting syndicate, that a balanced treatment of the different categories of investors is in place.
The Prospectus should contain information on how the securities will be allocated in the event of oversubscription. As a general rule, the allotment method should be made on a pro-rata basis, but other methods may be chosen subject to the CMVM’s approval.
An overallotment option may be provided in the placement/underwriting agreement, allowing financial intermediaries in charge of the placement of the shares to accept orders of subscription/acquisition of more shares than the number that the number initially offered.
The expiry of the over-allotment option is generally 30 calendar days after the closing of the offer. The number of shares offered in addition to the Public Offering may not exceed an amount representing 15% of the amount of the Public Offering. The possibility of increasing the size of the offer up to these amounts must be announced in the Prospectus and must be communicate to CMVM.
To cover over-allotments, the banks involved in the Offer are generally granted a “greenshoe option” by the Company and/or selling shareholders, which allows them to acquire an additional amount of shares either from the Company’s shareholders or by subscribing for new shares to be issued by the Company. The exercise of the over-allotment cover option may not exceed 15% of the amount actually subscribed to the Offer.
Assessment of Results, Settlement and Listing
At the end of the offer period, the final price is determined, and a final number of shares is allocated to the Public Offering and, in the event the Offer also comprises a private offering to institutional investors the underwriting agreement for this offering is signed between the Company and/or selling shareholders and the financial intermediaries.
On the following day, the results of the Public Offering are assessed, by the Company’s financial advisor or in a Euronext’s special stock exchange session.
In case the Offer includes the subscription of newly issued shares, the Company must register the share capital increase with the commercial registry office, a formality necessary for the settlement of the offer.
The settlement occurs with the payment to the company and/or selling shareholders of the proceeds of the offering vs. the delivery of shares to the investors (made through the credit of their securities accounts by the financial intermediaries through which the subscription/acquisition orders were processed).
The shares will only be effectively admitted to trading on the stock market following the settlement of transaction.