IPO market opens for PE companies without options
NEW YORK (Reuters) - An improved U.S. IPO market is a big boost for buyout-backed portfolio companies that have no other obvious exit route because their business models are not particularly attractive to rivals or they are too big.
"There are lots of companies that are naturally not appealing to a typical strategic. Toys R Us: nobody feels like they have to own that as a strategic, I don't think," Garrett Moran, a senior managing direct at Blackstone Group LP (BX.N), told the Reuters Global Mergers and Acquisitions Summit.
"There are lots of examples of that and I think you will see more of that," Moran said on Wednesday.
U.S. retailer Toys R Us TOY.UL was taken private in 2005 by Kohlberg Kravis Roberts & Co (KKR.N), Bain Capital and shopping center operator Vornado Realty Trust (VNO.N) in a $6.6 billion deal.
It is one of a number of companies acquired by a consortium of private equity firms at the peak of the buyout boom that has yet to return to the public markets. The company is on file for an IPO of up to $800 million and it is expected to float shares this year.
There would be little interest from competitors in buying Toys R Us, retail bankers have previously told Reuters, citing its highly competitive and low-margin business.
Private equity firms typically exit their investments either by taking them public or by selling to a company in the same sector, a so-called "strategic" buyer.
The recent opening in the U.S. IPO market has allowed a number of private equity-backed companies -- including those that are too large to be bought, like hospital operator HCA Holdings Inc (HCA.N), which was a $21 billion buyout -- go public.
LOOKING FOR AN EXIT
The credit crunch, which came directly after the buyout boom, trapped private equity firms without new capital. They had trouble financing leveraged buyouts and selling companies they already owned.
But with debt markets robust and the stock market open to initial offerings, the environment for bringing bought-out firms back to the markets has greatly improved. Capital markets bankers told the summit on Tuesday that they expect private equity to continue driving the U.S. IPO market this year and account for roughly half of the deals.
Of the 26 IPOs in the United States in the first quarter, only 11 were backed by private equity firms, but they accounted for $10.9 billion of the $14.9 billion raised, according to Thomson Reuters data.
Three companies came on each other's toes and consecutively replaced each other as the biggest ever U.S. buyout-backed IPOs: Consumer measurement company Nielsen Holdings (NLSN.N) raised $1.9 billion, pipeline operator Kinder Morgan (KMI.N) raised $3.3 billion and hospital operator HCA Holdings (HCA.N) raised $4.4 billion, according to the data.
Investors will continue to buy private equity IPOs as long as they are either very high quality or very cheap, said John Coyle, a partner at Permira.
"I think what we all worry about is if people start to push the definition of what is a high quality company and investors say that doesn't meet the high quality test -- and it's also not really cheap," Coyle said.
The clock is ticking on many of the companies taken private during the buyout boom. Private equity firms buy companies looking to sell them after about three to five years.
"I do think over the next two to three years there is just a lot of stuff in people's portfolios that has to come out," said Steve Zide, a managing director at Bain Capital.
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