IPOs have increasing relevance in the automotive sector

Electric vehicles in particular are seen as an attractive investment opportunity with the largest IPOs being seen in the US and China.

The work necessary to prepare for an IPO should not be underestimated, however. Businesses in the automotive sector should seek professional advice across all elements of the process.

The global IPO market

An IPO involves a private company offering investors the opportunity to acquire shares in it via a public stock exchange as a means of raising capital.

However, IPO candidates continue to face an extended period of uncertainty, coupled with shifting sentiment in capital markets and ongoing concern over fresh coronavirus outbreaks around the world. Other global factors, from the US election, Brexit negotiations, US-China tensions and low oil prices have also impacted on the global IPO market in much of 2020.

IPO candidates should be prepared to complete the IPO quicker, to conduct virtual investor meetings and consider alternative funding or exit options. Investors will review equity stories in light of potential Covid-19 impact.

Automotive sector

The main drivers for IPOs in the automotive sector are electric vehicle companies. There has been considerable activity during 2020 in this regard involving Chinese manufacturers.

Xpeng Motors, for example, raised €1.5 billion after going public in New York. Li Auto Inc, formally known as CHJ Automotive, also raised $1.1 billion in a New York IPO. Both companies raised more capital through the IPOs than was expected, and both followed in the footsteps of the first Chinese electric vehicle start-up, NIO, going public in New York in 2018.

Elsewhere, Zhejiang-based car maker Geely Automobile Holdings, which makes the Geometry A electric car, announced its plans to list on Shanghai’s Nasdaq-style Star Market.

Investors have seen an opportunity to make returns in the electric vehicle market after watching California-based Tesla overtake Toyota Motor, Volkswagen and Hyundai Motor this year in terms of combined market value to become the world’s most valuable car maker. 

Although the entire German automotive industry including component supplier companies is one of the most important industrial branches, we have not seen IPOs of German electric vehicle companies so far.

The shares of TRATON SE, one of the leading manufacturers of commercial vehicles worldwide, were listed in the regulated market of the Frankfurt Stock Exchange (Prime Standard) and in the regulated market of Nasdaq Stockholm (Large Cap Segment) in June 2019.

The STS Group, a leading global system supplier for interior and exterior parts focused on commercial vehicles, went public in May 2019 with the official listing of its shares on the regulated market of the Frankfurt Stock Exchange (Prime Standard).

A successful reverse IPO in the European electric vehicle market

On 7 December 2020, shareholders at the annual general meeting of Catinum AG voted in favour of the "reverse IPO" of Fox Automotive Switzerland AG.

The near €70 million deal will see Catinum AG change name to fox e-mobility AG, which is a German-based manufacturer of battery electric vehicles (BEVs). The company's shares will initially be listed on the Open Market of the Düsseldorf Stock Exchange and it is looking to launch a state-of-the-art new electric vehicle, the MIA 2.0, in 2023.

Preparing for an IPO

With the excitement in the market, particularly around potential growth in electric vehicles manufacturer stocks, it unsurprising that many businesses active in the automotive sector would be considering IPOs as a way in which to raise funds of their own.

However, there are a range of factors that businesses must get right to ensure an IPO runs smoothly.

Timing

Typically an IPO will take about six months to complete so businesses need to consider when in their financial calendar it is best to launch. For premium listed companies the prospectus must ordinarily contain three years of audited historical financial information ending not more than six months from date of prospectus or within 135 days of such audit.

Advisory team

Businesses will need to appoint at least one investment bank to act as underwriter and listing agent, as well as reporting accountants – including tax advisers and auditors where appropriate. They will also need to appoint lawyers for the company and for the bank, financial PR, and printers. Financial advisers are often appointed to help the company manage the overall process.

Group structure and current ownership

Businesses must give thought to what they are listing in order to understand whether some form of restructuring is necessary. They should ask themselves, for example, whether they need to spin out any parts of the business or clean up the group structure to get rid of dormant subsidiaries or dividend blocks, and examine what consents are required from the existing shareholders or other third parties.

Capital structure

At the point of an IPO there should be a single class of ordinary shares in the listing company. To achieve this, businesses will need either to flatten the existing capital structure or insert a new holding company. Tax and legal advice will be required.

Offer structure

Businesses need to decide whether they wish to raise new money or whether existing shareholders will be selling down, in which case businesses will generally need a minimum free float of 25%. A decision will also need to be made as to whether to offer shares into the US, and whether to offer shares to retail investors, employees or customers.

Corporate governance and board structure