Investing

IPOs: Betting on Big Brands


The initial-public-offering market is suddenly crowded with some very high-profile players.

Among the private companies looking to go public are Hyatt Hotels, which said it was considering an $1.15 billion IPO on Aug. 5, and Dole Food, which filed notice on Aug. 14 for a $500 million offering.

The name behind another iconic U.S. brand—poultry processor Swift & Co.—is also throwing its hat in the IPO ring. JBS USA Holdings, a unit of Brazil-based JBS filed for a $2 billion IPO on July 22. Even as a standalone company, JBS USA would be the world's largest beef producer, with $15.4 billion in sales last year.

Dollar General's Declaration The latest notable IPO candidate is Dollar General, which officially declared Aug. 20 that it may raise $750 million from a stock market offering. With 8,577 stores in the U.S., the discount retailer claims to be "the nation's largest small-box discount retailer."

All the IPO activity this summer is quite a contrast from the previous nine months. In the past three quarters, according to Hoovers, IPO filings were made by only 13 companies with a combined value of less than $3 billion. However, in less than two months since the start of the third quarter in July, 21 firms valued at nearly $10 billion have filed.

Not all companies that file for IPOs actually go through with stock offerings. In fact, the brutal stock market in late 2008 and early 2009 unexpectedly derailed many an IPO.

Big Climate Change The uptick in IPOs has coincided with a rebound in equity markets. "There were no calls for months and months," says Scott Gehsmann, a partner atPricewaterhouseCoopers, who helps companies prepare for IPO filings. Since May and June, "it's picked up immensely—and continues to pick up."

Because filings can take three months or more to prepare, you can expect even more IPOs being floated soon. "Three to six months from now you're going to see immense growth," Gehsmann says.

The Dollar General offering in particular demonstrates how much the environment for IPOs has changed in recent months. Of the few firms that have successfully gone public in the past year, there have been "common threads," says Scott Sweet, senior managing partner of IPO Boutique. In a tough economy, those firms have shown strong revenue and profit growth. And, during a credit crisis, those companies could tout very low debt loads.

Private Equity is Back Dollar General, though, has more than $4.1 billion in debt. While IPO investors were once allergic to debt, they now are more comfortable with debt that, like Dollar General's loans, seems manageable, says Matt Therian, an analyst at Renaissance Capital in Greenwich, Conn. The firm had sales of $10.5 billion last year, a 10% increase over the previous year. "You're going to see companies carrying more debt than earlier, but it's all a matter of whether you can support it," he says.

Another new characteristic of the IPO market is that private equity shops are back. Legendary buyout firm Kohlberg Kravis Roberts, or KKR, took Dollar General private in 2007, part of a private equity boom that ended abruptly when the financial crisis began two years ago. Sweet estimates $1.6 trillion in buyout deals were announced from 2005 to 2007.

For the first time, private equity is beginning to cash out of the deals made during this period. On Aug. 6, the IPO of Avago Technologies (AVGO) was widely seen as a success for its former private equity owners, KKR and Silver Lake. The semiconductor outfit is up 8% since its debut and has a market value of almost $3.7 billion.

Focus on Quality In the past, IPO watchers like Sweet were often wary of private equity-sponsored IPOs. Firms would buy companies, change management and then quickly bring them public again —a process a little like "putting lipstick on a pig," Sweet says. That's changed, however. "They've put forth a more valiant effort to straighten them out," he says. "The market is more discerning right now."

The improvement in equity and credit markets since the spring has not made it a slam-dunk to launch an IPO. Rather, IPOs have "a reasonable chance of getting a fair hearing from investors," says Tim Walker, an analyst at Hoovers.

Investors are looking for exceptional IPOs, with the "kind of story they can buy into," Walker says. A strong brand name can be one attractive feature, he says, especially for companies that are otherwise unknown to stock market investors.

An Exception to the Rule The FTSE Renaissance IPO Composite Index is a measure of the stock performance of recent IPOs. In 2009, the index is up 35%, compared to 13.5% for the broad S&P 500 index. That's the kind of return that can attract new investors to the IPO market, Therian says.

Not all IPOs have delivered, however. Shares of Rosetta Stone (RST), a language software firm, have fallen 15% since its April IPO, after disappointing results. But Rosetta Stone is an exception to the rule.

Investors have been pleased with the quality of initial offerings that have made it to market in 2009, and the outlook for offerings is looking brighter. The main question is whether some unexpected event—a stock market sell-off, a deepening of the financial crisis, an unexpectedly disappointing high-profile IPO— will rain on this parade.
Steverman is a reporter for Bloomberg News in New York.

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