Italy's Leonardo in surprise U-turn on U.S. unit listing
MILAN (Reuters) – Italy’s Leonardo shelved a listing of its U.S. electronics unit DRS in a surprise move that sent shares in the defence and aerospace firm down more than 10% on Wednesday.
Leonardo, which had hoped to use the proceeds from the initial public offering (IPO) to cut its debt pile and fund potential M&A, said adverse market conditions had prevented an adequate valuation of the unit.
“The IPO was hit by expectations the U.S. administration could trim its military spending to focus on its stimulus package for the whole economy,” one source close to the matter told Reuters.
Leonardo, which had been looking to complete the listing by the end of March, was offering about 22% of DRS on the New York bourse, valuing the stake at up to $702 million.
Leonardo was expected to receive all the proceeds from the offering, while DRS intended to keep future profits for growth.
One of Europe’s biggest defence players, the state-controlled firm formerly named Finmeccanica bought DRS in 2008 in a deal valuing DRS at $5.2 billion, including $1.27 billion debt.
On Wednesday Leonardo said the decision to postpone the offering was made “notwithstanding investor interest within the price range during the course of the roadshow”.
Demand for the IPO was not bad, but was skewed towards hedge funds and other speculative investors, creating the risk of a lacklustre performance for DRS shares once listed on the NYSE, another source with knowledge of the matter said.
“Since Leonardo is not a forced seller, it decided to pull the share sale,” the source added.
Leonardo shares fell as much as 11% and were down 6.7% as of 1228 GMT, making the group the biggest loser on Milan’s blue-chip index.
Volumes for IPO have hit their highest levels in years in 2021 on both sides of the Atlantic. But, in a low-rate environment, the emphasis has been on growth sectors such as technology and e-commerce, with traditional sectors such as defence meeting with a more muted response from investors.
The IPO of DRS, which counts the U.S. military as a customer, was launched last week.
DRS specialises in naval systems, ground combat mission command and network computing, satellite communications and network infrastructure, avionics and other equipment.
“DRS remains a core part of Leonardo’s business portfolio and the IPO will potentially be revisited when market conditions are more favourable and a successful IPO at an appropriate valuation … can be achieved,” Leonardo said.
The IPO was meant to provide fresh financial resources for Leonardo, which saw its net debt increase to 3.3 billion euros last year, from 2.8 billion euros in 2019.
The group is sitting on a large buffer of liquidity but with the airline sector hurting from the pandemic, demand is down and its Aerostructures division is expected to absorb 350-400 million euros of cash in 2021.
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