IPOs have increasing relevance in the automotive sector

Out-Law Analysis | 16 Dec 2020 | 11:43 am | 4 min. read

Initial public offerings (IPOs) are growing in popularity within the automotive sector as a means of raising capital, whether that is incumbent original equipment manufacturers (OEMs) seeking to fund diversification or emerging technology start-ups using them to scale up their operations.

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.

After a strong start in 2020, IPO activity declined across all regions in the further course of the year, as equity markets suffered fears of a global recession caused by Covid-19.  The few bright spots were in the technology, industrials and health care sectors. Due to the Covid-19 pandemic, we have seen a quite different IPO environment with shortened roadshow periods and virtual investor meetings.

As economies began to reopen gradually, IPO activity also began to increase again, with a number of highly valued companies revealing plans to go public in the months ahead. There may also be a number of spinoffs and other transaction strategies that lower the risk of short-term volatility in the critical placement phase. This option was pursued by Siemens in 'spinning off' its Siemens Energy division, for example.

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.

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

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.

Thomas Alexander

Dr. Alexander Thomas

Rechtsanwalt, Partner

Commercial, financial and legal due diligence is vital
Preparing-for-an-IPO
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

Businesses should consider the size and shape of the management board and the supervisory board of the listing entity, as well as the identity of chair, independent non-executives, governance committees and membership.

Due diligence

Commercial, financial and legal due diligence is vital. An electronic data room should be prepared once scope is agreed.

House-keeping issues

Businesses should assess whether there are any red flags or other house-keeping issues which will need to be dealt with ahead of IPO.

Systems and controls – financial and non-financial

As a listed company, the business will need to ensure they have appropriate systems and controls in place to meet their various regulatory obligations. The reporting accountants will work with the business to ensure they have appropriate financial procedures. The lawyers and bank will work with them on their disclosure and compliance policies.

Share option plans

Businesses should consider adopting new plans ahead of the IPO.

An opportunity to raise fresh capital

Connected cars, autonomous vehicles, sharing or subscription models, and electrification are becoming more and more important for market success in the mobility sector. Start-ups that want to develop these products in these business areas have a great need for investment.  Raising funds on the capital market can be a main source of financing for these investments.

The way we move is changing radically – climate change, superfast telecoms networks, electrification, AI and digital payments are rewriting the transport rulebook. Autonomous and shared vehicles and mobility as a service are fast becoming a reality.