RPT-IPO VIEW-Mead Johnson aside, IPOs struggle

Sun Feb 15, 2009 11:55am EST

(Repeating item that initially moved on Friday)

By Phil Wahba

NEW YORK Feb 13 (Reuters) - The success of Mead Johnson Nutrition Co's (MJN.N) initial public offering last week has buoyed investors, but was likely just the first step in a recovery of the U.S. IPO market that is still closed to all but the most solid companies.

Investors starved for new product lapped up the stock of Mead Johnson, the children's nutrition company, buying 5 million more than originally estimated, and sending the stock soaring 10 percent in its debut Wednesday.

The $720 million flotation was the largest in 10 months in the United States, and the first in nearly three months.

"The Mead Johnson IPO showed that there are buyers out there when they can find growth in a private company (that goes public), but can't in a public company," said Scott Cutler, executive vice president of listings for the Americas at New York Stock Exchange operator NYSE Euronext Inc NYX.N.

But Mead Johnson, a profitable spin-off from pharmaceutical giant Bristol Myers Squibb Co (BMY.N) known for its infant formula Enfamil, was only one of four planned IPOs to succeed. The other three did not go last week.

On the positive side, Mead Johnson's IPO was the second in a row to perform well. The other was last November's debut by on-line university operator Grand Canyon Education Inc (LOPE.O), which has risen 50 percent over its offer price.

"It's one of the baby steps necessary before we can walk again," Kathleen Smith, chairwoman of Connecticut research firm Renaissance Capital said, referring to the gradual return of successful IPOs. "The IPO market is very fussy."

Last week showed just how many steps are left.

O'Gara Group Inc OGAR.O, a homeland security company originally seeking to raise $144 million, lowered its estimate range Thursday after delaying its pricing, initially set for Tuesday, but is now "day to day."

Real estate investment trust Madison Square Capital Inc MDQ.N also put off an IPO until the coming week, while Changing World Technologies Inc CWL.A, which makes fuel from waste, reduced its estimated IPO range before canceling the IPO altogether Thursday.

"When they become 'day-to-day', they become damaged merchandise, and it shows there is little demand for them," said Francis Gaskins, an analyst with IPO Desktop.

The deals had trouble in part because they are small, and are attractive only to a limited number of investors, Smith said.

"Investors have been burnt by illiquid stocks and want to be able to get in and out of a stock quickly. There is high sensitivity to trading liquidity now."

The Mead Johnson IPO debuted at $26, at an 8.3 percent premium, giving the stock a price-earnings multiple of about 12.9, compared with 11.24 for the S&P Personal Products Sub-Industry Index .GSPCOMS.

Mead Johnson is the first stand-alone pediatric nutrition company to go public. Its main competitors are Nestle SA (NESN.VX), Abbott Laboratories (ABT.N) and Wyeth WYE.N.

DOOR AJAR

One of Mead Johnson's biggest advantages was its status as a profitable, growing spin-off of a multinational, so investors were familiar with it.

While the Mead Johnson deal is unlikely to blow the IPO doors wide open, it could open them up a bit for other spin-offs in the pipeline because of the familiarity and liquidity that larger deals offer, analysts said.

"This is a sign that any company that needs capital and has a crown jewel subsidiary is invited to spin it off," Smith said.

The pipeline includes deals by Cloud Peak Energy Inc, the U.S. coal business unit of Anglo-Australian mining company Rio Tinto (RIO.L)(RIO.AX), and Artio Global Investors Inc, part of Swiss asset management company Julius Baer Holding Ltd (BAER.VX), which have both filed for IPOs of up to $1 billion.

Still, each faces its own challenges.

The last coal company to attempt an IPO, Rhino Resources Inc, shelved its flotation in August, right before it was set to price, and the market has shown scant appetite for new financial stocks.

What's more, Mead Johnson was the first carve-out since EMC Corp (EMC.N) spun off virtualization software maker VMWare Inc (VMW.N) in a $1.1 billion IPO in August 2007.

"Mead Johnson outlined the criteria for a successful spin-off. A company has to have positive cash flow, pay a dividend and have a brand," Gaskins said.

Those criteria also apply to any deal looking for a market.

"I am not saying the floodgates are open," Cutler said. "But the message is that a deal with scale and growth can go." (Editing by Jeffrey Benkoe)

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