Lower prices for recent deals indicate that IPO investors remain finicky even amid an equity-market rally
By Michael Tsang
(Bloomberg)—Carlyle Group and Goldman Sachs Group Inc. were forced to cut the price for the initial public offering of an oil explorer with no revenue or profits, while investors also extracted concessions from Blackstone Group LP in the latest setbacks for private-equity firms in the IPO market.
Cobalt International Energy Inc., controlled by private- equity funds of Carlyle, Goldman Sachs (GS) and three other firms, sold 63 million shares at a discount of as much as 21 percent yesterday. Blackstone BX raised only half the amount it sought after cutting the price and the number of shares offered in Team Health Holdings Inc. and dropping its plan to reduce its own stake in the company, data compiled by Bloomberg show.
While owners had used the biggest rally in the Standard & Poor's 500 Index since the Great Depression to unload more than $10 billion in stock in the past three months, companies from AEI to HealthPort Inc. that were backed by private-equity funds have postponed initial offerings. Investors are demanding concessions as leveraged-buyout firms count on IPOs to exit some of the $2 trillion in LBOs they made since the start of 2004.
"Investors are putting their foot down," said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991. "Knowing that a lot of these companies have debt to pay down, they are taking a stand and pushing for the lower valuation even when they still like the company."
Cobalt (CIE), which began trading today on the New York Stock Exchange under the ticker CIE, fell 1.6 percent to $13.28 as of 10:33 a.m. in New York. Team Health (TMH), which uses the ticker TMH, rose 6 percent to $12.72.
The S&P 500's 65 percent rebound from a 12-year low in March has spurred private-equity firms to rely on IPOs to help return cash to investors. Distributions to clients fell by two- thirds to $63 billion in 2008 from the previous year, according to London-based researcher Preqin Ltd., as the collapse of Lehman Brothers Holdings Inc. in New York froze credit markets.
The owners of Cobalt failed to convince investors to pay 61 percent more than the median U.S. oil explorer's so-called tangible net assets for a company that has yet to produce any oil from its deepwater fields in the Gulf of Mexico and off the coasts of Angola and Gabon and doesn't expect to generate any revenue from oil production for at least two more years.
Cobalt raised $851 million selling shares at $13.50 each, less than the $15 to $17 a share that its owners asked for, according to Bloomberg data. The company had sought $1.1 billion to fund drilling and exploration through 2011. Cobalt expects to start producing oil and generating revenue from its Gulf of Mexico fields between 2012 and 2014, a Nov. 27 filing with the U.S. Securities and Exchange Commission showed.
"It's a high-risk company," Einhorn said. "The fact that they were able to raise as much as they did shows that there was a lot of interest in the company's story."
However, "investors had the buying power," he said.
The offering exceeded Oklahoma City-based SandRidge Energy Inc.'s (SD) $842 million IPO as the largest by a U.S. oil and gas exploration company this decade, data compiled by Bloomberg show. Credit Suisse Group AG of Zurich and New York-based Goldman Sachs and JPMorgan Chase & Co. served as the lead underwriters for Cobalt's sale.
Tangible Net Assets
The IPO gave buyers a 19 percent stake in the Houston-based company, last month's filing and Bloomberg data show. The price leaves Cobalt with a market value of about $4.5 billion.
Cobalt had estimated it would have a so-called tangible book value, a measure of shareholder equity that excludes assets that can't be sold in liquidation, of $5.69 per share, after the offering and assuming an IPO price of $16, the filing showed.
At that price, the shares would have been valued at 2.81 times, higher than the median of 1.74 times tangible net assets for 150 U.S.-listed oil and gas exploration companies, which include those that have fields with proven reserves, according to data compiled by Bloomberg.
The IPO had also implied a so-called enterprise value, or the sum of its stock and debt minus cash, of 2.2 times Cobalt's tangible book value, according to Francis Gaskins, president of IPODesktop.com in Marina del Rey, California.
That was more expensive than the 1.9 times multiple that investors pay for Anadarko Petroleum Corp. (APC), the exploration company located in The Woodlands, Texas, that has reported five oil discoveries in deep waters of the Gulf of Mexico this year. Cobalt has stakes in two of those discoveries.
Rolling the Dice
The private-equity companies that controlled Cobalt didn't cash out. Funds run by Carlyle, the Washington-based firm with $88 billion in assets under management, and New York-based Riverstone Holdings LLC owned 27 percent before the sale, while Goldman Sachs and First Reserve Corp. of Greenwich, Connecticut, each had 27 percent stakes, last month's filing showed.
They stand to profit the most if their investment pays off. Existing owners paid on average $4.65 a share for Cobalt, whose fortunes may mimic those of OGX Petroleo e Gas Participacoes SA, the oil company controlled by billionaire Eike Batista, according to Renaissance Capital's Einhorn.
The oil explorer located in Rio de Janeiro raised $4.09 billion in June 2008 in what was then Brazil's largest ever IPO. Shares of OGX, which had yet to start drilling or producing oil when it went public, plummeted almost 80 percent to its low in November last year before surging more than sixfold as the company announced successive oil discoveries.
Team Health was the first of what Blackstone's Chief Executive Officer Stephen Schwarzman said in October may be eight companies the firm planned to take public.
The 13.3 million-share offering was 34 percent less than what Team Health originally wanted to sell. New York-based Blackstone, which owned almost 90 percent of Team Health, intended to cash in 9.33 million shares, equal to about 47 percent of the 20 million shares that the company had offered, a regulatory filing this month showed.
The private-equity firm dropped its portion of the sale and also accepted 25 percent less than it originally sought per share, after asking investors to pay as much as $16 apiece. The concessions decreased the amount raised from the IPO by 50 percent to $160 million. Team Health, which has $612 million in total debt, will use the most of the proceeds to repay its borrowings, according to a Dec. 15 regulatory filing.
The offerings from Cobalt and Team Health came after private-equity backed AEI of George Town, Cayman Islands; Aviv REIT Inc. in Chicago and Alpharetta, Georgia-based HealthPort shelved IPOs since Oct. 29.
"The quality standards have gotten dramatically higher," said Frederic Dickson, who manages $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "It looks like they missed the window."
To contact the reporter on this story: Michael Tsang in New York at firstname.lastname@example.org.