Should investors root against Hexion's IPO?

Posted by: Aaron Pressman on June 21, 2006

A day after cheering that J. Crew was reversing a leveraged buy-out with its LBO firm owner buying more shares in the IPO, comes news that convoluted chemical play Hexion is postponing its similar bid to go public. All I can say is, couldn’t have happened to a nicer guy. In the case of Hexion, investors might decide to cheer the deal’s demise as it’s just the opposite of J. Crew.

Hexion, which planned to go public last year and postponed after Hurricane Katrina, was expected to price 19 million shares at $25 to $28 a share. But just 3.8 million were new shares producing capital for the company. The other 15.2 million to be sold in the IPO were from Apollo Management and other LBO investors.

So the bulk of proceeds would have gone not to help grow or de-leverage Hexion but to “exit” the private equity buyers. Worse, on May 31 the company raised $550 million by selling preferred stock and borrowing from banks to — you guessed it — pay a special dividend to Apollo et al. I have to say I have not seen many pro forma debt tables like the one in Hexion’s latest SEC filing where total debt RISES from $2.34 billion on March 31 to $2.69 billion after the IPO and related adjustments. Ugly.

Finally, the deal had an assortment of other little niggling issues. The historical financial tables are a blizzard of footnotes and pro forma adjustments because the company has made so many complex acquistions over the past few years.

The section on internal controls notes that two recent purchases lacked the ability to produce results according to GAAP rules. “In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that need improvement, including closing, tax accounting and consolidation procedures,” the company notes. Need improvement, huh? Maybe they can get that done before rescheduling the IPO.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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