European brake maker's IPO hardly a rush job

The next big IPO coming down the track in Europe could scarcely be accused of rushing into it.

Brake maker Knorr-Bremse, founded in 1905, laid out plans Monday for an initial public offering in Frankfurt before the end of the year. This is a well-established business with barely any debt and no obvious requirement for equity as an acquisition currency. It just needs some new owners.

Knorr’s controlling shareholder and former CEO Heinz Hermann Thiele is not getting any younger and has concluded that stewardship of the company for the longer term requires the involvement of institutional investors. The invitation is likely to be well received.

The company straddles two brake markets, for trains and lorries, making it look like a European combination of US peers Wabco and Wabtech Holdings. This market evidently has high barriers to entry. Knorr, which generated €6.2 billion (Dh26.62bn) in revenue last year, estimates it has about half the market in braking systems for trains and more than 40 per cent in pneumatic braking systems for commercial vehicles. Its operating margin is around 15 per cent.

While Knorr is mature, it still has growth prospects. It is targeting annual organic revenue expansion of about 5 per cent in the next three or four years. After-market sales makes up about one-third of the business. The diversification, repeat revenue and commanding market positions help explain the company’s durability.

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Assume earnings before interest, tax, depreciation and amortisation (ebitda) next year nudges up to €1.2bn, extrapolating from last year’s €1.1bn. Wabtech and Wabco trade at 13 and 9 times 2019 ebitda, respectively. Knorr’s higher margins and more balanced business model could justify a premium valuation, closer to European engineers like Assa Abloy, Schindler or Kone. Even with an IPO discount it’s not hard to reach an equity valuation of €13bn or more given that the company is practically debt-free.

If 30 per cent of the company is sold, the offering would be around €4bn worth of stock - the biggest in Europe this year after Siemens Healthineers. That’s a lot of buyers to find.

Investors need to be wary of two risks. One is the possibility of M&A. Knorr may not need equity to do deals and hardly needs to chase market share, but it is acquisitive, having tried and failed by buy smaller Swedish peer Haldex last year. With a minority position, investors won’t be able to rein in management if it decides to pursue something pricey.

The other question is future governance. There is no stated plan for Mr Thiele to sell below 50 per cent. The likelihood is that the stake ends up being controlled by a family foundation whose governance, character and goals investors cannot know right now. But given Knorr’s record, who wouldn’t want to go along for the ride?

Bloomberg