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Don't Blink -- You'll Miss The IPO


Buyout firms want their money back -- now. Taking a company private and spending years remaking it before cashing out seems so 1980s. Instead, impatient firms are taking companies public just months after they buy them.

Consider the recent rush to go public by satellite service providers. Less than a month after a consortium of private-equity firms, including Apax Partners and Apollo Management, finished taking Intelsat private, the company began jawboning investment bankers in February about going public. Intelsat, Apollo, and Apax would not comment. Five months after a group of buyout firms, including Kohlberg Kravis Roberts and Carlyle Group, bought PanAmSat, the company registered for an initial public offering in December. All three declined to comment.

That sort of fast-tracking is quickly spreading across industries. In February, Leonard Green & Partners LP took flower delivery company FTD Group Inc. (FTD) public just less than a year after it went private. Nine months after Blackstone Group Inc. took industrial chemical maker Celanese Corp. (CE) private, the company went public in January. And five months after a consortium led by Blackstone picked up coal producer Foundation Coal Holdings (FCL), the company did an IPO in December. Blackstone points out that it still has large investments in both companies and continues to work closely with their management teams.

What's going on? The trend is the latest twist in an escalating battle on Wall Street between buyout firms and their hedge-fund rivals. Hedge funds have recently started encroaching on the buyout firms' territory, buying controlling stakes in companies rather than just picking up some shares. That has prompted buyout artists to complain that the hedge guys don't have the patience to turn around a company. Now, though, some buyout firms are displaying signs that they're the ones developing an attention deficit disorder.

The main driver is the robust demand for IPOS of companies with stable cash flows and high dividend payouts. But the performance of these speed-of-light offerings has been mixed. Rising commodity prices are lifting the stock of Foundation Coal, which has topped the Standard & Poor's 500-stock index since it went public. But Celanese is trailing the benchmark index.

Investor returns pale in comparison with the money buyout firms are raking in from some deals. For example, FTD's stock price is up 4% since its IPO even though the S&P 500 has been flat. By contrast, Leonard Green reaped twice its initial $183 million equity investment in FTD when it took the company public in February. Almost all the proceeds from FTD's $200 million IPO -- $198 million -- went to buy back preferred stock from Leonard Green and to terminate its management-services agreement with the firm. Green's remaining 54% stake in FTD, including a $30 million chunk it bought at the time of the IPO, is worth about $200 million.

CLEVER ENGINEERING?

Some investment bankers view the buyout firms' race to market not so much as a giddy rush to the exits but rather as an integral part of corporate turnarounds. For example, some companies may use their newly issued stock as currency to make acquisitions in consolidating industries. "Buyout firms are taking advantage of a window of opportunity, but they will still own a meaningful piece of the companies," says Ros Stephenson, a managing director at Lehman Brothers Inc. (LEH) who advises buyout firms.

Still, critics say the trend raises questions about why the companies are going private in the first place. They charge that some deals look a lot more like clever financial engineering than traditional fix-ups. Says Daniel S. Loeb, founder of hedge fund Third Point Management LLC, "certain private-equity firms hold themselves out as having specific management expertise, but many just do the basic blocking and tackling that any second-year MBA could perform." Even so, as long as the market rewards cosmetic improvements, buyout firms will follow the money.

By Emily Thornton in New York


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