Greed and honesty lost the day -- Stock exchange listing failure for LM Glasfiber

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The seller's greed and a flotation prospectus that was perhaps too honest cost LM Glasfiber its entry onto the Danish stock exchange. The flotation was cancelled one day before LM shares should have started trading on May 3. But the cancelled stock market introduction has created new problems for the company, which last year held 40% of the market for wind turbine rotor blades.

The official explanation for the company's decision not to go public, announced by LM's managing director Anders D Christensen on the evening of May 2, was a lack of interest in the Initial Public Offering during the book-building phase in late April. In fact, the more than 24 million shares on offer had all been sold. Indeed 50% more shares had been taken than the emission had made available.

The problem was that the type and combination of buyers apparently caused red lamps to flash among the leadership at LM. Private and institutional investors in Denmark, who would normally sign up for 40% of the shares of a new public company, had only bid for 10%. The majority of LM shares would be going to international investment funds, which nearly always sell their holdings in new public companies immediately they enter the stock market -- with the aim of scoring a quick profit. Such a sequence of events could lead to a clearance sale of LM shares, with the risk of a catastrophic fall in the price. That risk was avoided with the cancellation of the flotation on May 2.

The reason that new problems have been created for LM lies in the chain of events leading up to the aborted attempt to go public. The original owner of LM (the company was founded as a furniture maker based in the town of Lunderskov, so the initials stand for Lunderskov Møbelfabrik), Flemming Skouboe, sold out to a British investment institution in the spring of 2001. Doughty Hanson paid EUR 322.8 million for LM, with 11 factories in five countries, a sum almost equal to the EUR 336.3 million turnover that year.

Big borrowing

In reality, Doughty Hanson only invested EUR 40.35 million. The remainder of the sum was borrowed from German bank Dredsner Kleinwort Wasserstein, the company which later orchestrated the failed flotation. As well as interest payments on the EUR 282.45 million, the bank had been hoping for an emissions fee of EUR 17.75 million once the stock market introduction was complete.

The EUR 228-269 million that new shareholders should have pumped into the company was earmarked not for technology development, seen by LM as a decisive factor for future success, or to stimulate company growth, but to pay back Dredsner Kleinwort Wasserstein. The end result of that manoeuvre would have meant that new shareholders would have paid the same amount for half the shares in LM that the entire company cost a year ago, while Doughty Hanson, owner of the remaining shares, retained its influence in the company.

This was the reason behind the criticism by stock market analysts that the indicative share price set by LM, at DKK 70-82 (EUR 9.42-EUR 11.03), was too high. As Danish share analyst company Dansk Aktie Analyse (DAA) said, it was difficult to see that LM's value should have risen by 60% since Doughty Hanson bought it in 2001, while share prices of the two publicly traded Danish wind turbine companies, Vestas and NEG Micon, had fallen 40% in the same period. The same scepticism was directed at LM's promise to "maintain" a profit margin of 18-20% when the margin the past three years has been 8.3%, 10.7% and 15.1%, respectively. That LM can increase its profit in a market when its four largest customers, representing 76% of LM's production last year, have all started their own blade production, or are preparing to do so, only increased the caution of prospective investors.

Price too high

Meantime, LM's owners refused to budge on the indicative share press they had set. As a result, a series of Denmark's major traditional investors in the stock market remained on the sidelines. "It's not that there's anything wrong with the work behind the bourse introduction. The share price is just too high," said Dorrit Vanglo of The Danish Employees' Capital Pension Fund.

LM's owners, however, continued to insist that the price was a fair reflection of company value. Another reason for why the price was not reduced is that it had to stay at that level to make it possible for LM to pay back the loan from Dredsner Kleinwort Wasserstein; or to secure Doughty Hanson an exceptionally good return on its investment, as some have referred to the British company's purchase and attempted sale of half of LM. That the manoeuvre failed is interpreted by some analysts as a healthy indication that market mechanisms have triumphed in ensuring that price and value are one and the same, also with stock market flotations.

Less diplomatically, others point out that LM's ownership overstepped the mark when they so openly attempted to get new shareholders to pay for a purchase conducted by Doughty Hanson just a year ago, while the British company retained half the shares -- for which in practice it would have paid nothing. Doughty Hanson is known in Danish financial circles for its purchase of Osteometer in 1996 for EUR 53.8 million, with the aim of turning it into a public company. The bid failed and Doughty Hanson was forced to sell Osteometer for EUR 6.7 million, a loss for Danish banks, too, that is well remembered. For this reason it was with more than the usual dose of caution that the market set Doughty Hanson's dance with LM under focus. The big question now is how long Doughty Hanson will hold on to LM.

More problems

Before that question is answered, other problems are crowding in on the world's largest producer of wind turbine blades. A capital holding of just EUR 38.3 million and total debts of EUR 457.3 million make LM so vulnerable that a financial injection is essential, according to DAA. As well as the economic pressure, come market pressures too, described by LM in its open-hearted prospectus as "the biggest threat to our position as market leader," the "growing own-production of blades among our key customers." The four largest customers are wind turbine manufacturers Bonus, Enron Wind (now GE Wind), NEG Micon and Nordex. Sixteen smaller companies accounted for the remaining 24% of turnover.

LM is well aware of the need to be out in front in the evolution of larger and lighter blades. The company development department, the wind industry's largest, employs 120, 80 of whom are engineers. The technological development in materials, design and fabrication is expected to make it increasingly difficult for others to just copy blades and make them. But just the threat of in-sourcing blade production among turbine manufacturers is said to be enough to put pressure on LM's product prices, particularly the products to its largest customers.

As a result, profit margins are at risk and the picture of the company painted by Christensen prior to the initial public offering could well change. "We have great faith in LM's underlying value and growth prejections. A stock exchange listing at less than the publicly declared indicative price will not be a true reflection of the company's value and we believe that view will be underpinned by our future economic results. On the basis of the level of our business so far in 2002 we are convinced that we will exceed the economic goals put forward in our provisional stock listing prospectus," said Christensen.

LM now has the opportunity, before it is either sold or another attempt is made to float the company, to prove that it can live up to its expectations.

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