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Analysis: Fund investors may puncture tyremaker Pirelli's hopes on IPO price
September 14, 2017 / 3:21 PM / 10 days ago

Analysis: Fund investors may puncture tyremaker Pirelli's hopes on IPO price

FILE PHOTO: Pirelli tyres on display in paddock area of Russian Grand Prix in Sochi, Russia. REUTERS/Maxim Shemetov/File Photo.

MILAN/LONDON (Reuters) - Tyremaker Pirelli may struggle to get the 9 billion-euro ($11 billion) valuation sought by its owners on its return to Milan’s stock market next month, with several fund managers saying they will not invest if it is valued at more than 7.5 billion euros.

China National Chemical Corporation (ChemChina), which bought a controlling stake in the maker of Formula 1 racing tyres two years ago, is with two other shareholders selling up to 40 pct of Pirelli in a public offer, seeking a valuation of up to 9 billion euros, sources familiar with the matter said.

That valuation would raise up to 3.6 billion euros, making it Europe’s largest offer this year, ahead of the 3.4 billion euros raised by Allied Irish Banks in June.

Banca IMI, one of the three global coordinators of the IPO, has given an equity valuation for the whole group of between 7.6 billion and 8.7 billion euros, or around 13.7 to 15.5 times Pirelli’s forecast earnings for next year.

But four Italian fund managers said the group was worth between 7 and 7.5 billion euros, representing an earnings multiple of 12.5-13.5 times, above rival tyremakers Michelin and Continental but short of the industry’s most highly valued manufacturer, Finland’s Nokian.

They said their valuations reflected Pirelli’s relatively high debt, complex governance structure and risk that the share price could be hit by a wave of selling once a lock-up period for one of the existing minority shareholders expires.

One large London-based investor who has looked at Pirelli’s offer said the group was a good business but whether it deserved a premium valuation was questionable.

Pirelli declined to comment.

“I am not going to buy it if it’s valued at more than 7.2 billion euros,” said Angelo Meda, head of equities and portfolio manager at Banor SIM, which manages assets of 4.8 billion euros.

Giacomo Tilotta, portfolio manager at AcomeA SGR which has 1.5 billion euros of assets under management, said he considered the group attractive at around 7-7.5 billion euros.

Pirelli, established in 1872 and one of Italy’s best-known corporate names, is expected to give a price range for the IPO this week and set a listing date of Oct. 4.

The company markets itself as a premium tyremaker focusing on upmarket consumer tyres. The group’s less profitable truck and industrial tyre business is being retained by ChemChina.

VALUATION DEBATE

Banca IMI said in a confidential study that Pirelli warranted a valuation above its direct peers’ average 2018 earnings multiple of 11.1, citing its “superior financial profile and higher expected earnings growth”.

Rivals Continental AG and Michelin trade at around 10.8 times earnings, according to Thomson Reuters data. Nokian Tyres, which specialises in winter tyres, trades at around 15.9 times earnings.

“Pirelli is at the forefront of a trend for fitting vehicles with larger and larger tyres, but it’s not a protected niche. Other tyremakers are making in-roads into this market, which might erode its profit margins as competition heats up,” said the London-based investor.

A person familiar with the matter said more than 700 potential investors in Europe, Britain and the United States had expressed an interest in the IPO, which is being marketed by nine leading Italian and foreign investment banks, led by global coordinators Banca IMI, JP Morgan and Morgan Stanley.

State-owned ChemChina holds 65 percent of Pirelli’s sole shareholder, Italy-based Marco Polo, through a Luxembourg-based firm. Pirelli boss Marco Tronchetti Provera and banks Unicredit and Intesa Sanpaolo hold around 22 percent of Marco Polo via a holding company. The rest is held by investment fund LTI, linked to Russia’s Rosneft, which has a lock-up period of 180 days after the IPO.

The person familiar with the matter said Rosneft had never expressed a desire to sell out. Another source close to the deal said Rosneft was likely to sell, but noted its stake after the IPO would be a single digit.

ChemChina will remain the biggest shareholder after the IPO, with around 40 pct. Pirelli has sought to ease concerns about its future independence by pledging a hands-off attitude by key shareholders, saying Pirelli’s board will have a majority of independent directors and that Tronchetti Provera will play a key role in picking his successor in 2020.

Banca IMI gives Pirelli an enterprise value of 11 to 12 billion euros, including net debt of 3.36 billion euros. Two years ago, when ChemChina bought the business and delisted it, Pirelli had an enterprise value of roughly 8.3 billion euros, though that included the industrial tyre division.

“When it was de-listed it had an enterprise value of around 8 billion euros. Now that the company is a bit smaller they are seeking an enterprise value of up to 12 billion. That’s too much in my view,” said Meda of Banor SIM.

Tilotta said debt was the main reason for factor against a hefty premium over peers. Pirelli’s net debt is 3.1 times estimated 2017 core earnings, compared with 0.8 times for Michelin in the first half of 2017, while Nokian is cash positive.

“In our view, the company is asking the investor to pay for future success upfront, when the future, in fact, holds a number of challenges for them,” the London-based investor said.

($1 = 0.8410 euros)

Additional reporting by Agnieszka Flak in MILAN; Writing by Silvia Aloisi; Editing by Mark Bendeich, Greg Mahlich

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