Penthouse parent's IPO might be tough sell

By Phil Wahba

NEW YORK (Reuters) - Does sex sell in a bear market?

Adult social networking company FriendFinder Networks Inc, which publishes Penthouse magazine, is testing the waters of the initial public offerings market, but may find them ice cold.

Established underwriters who avoid "vice" industries such as adult entertainment and online gambling are not on board, and investors have punished adult-themed stocks lately, dimming the prospects of the $460 million IPO, analysts said.

FriendFinder generates most of its money from subscription-based sexual liaison sites. Penthouse Media Group bought FriendFinder in December 2007 for $500 million and took the FriendFinder name last July.

Its largest site, AdultFriendFinder.com, has 131 million members, according to a regulatory filing.

That makes Florida-based FriendFinder's IPO appealing to investors looking for social networking companies whose growth rates could rival Facebook or News Corp's MySpace.

"It has found a niche in the adult market that has not been tapped," said Scott Sweet, a senior managing director with advisory firm IPO Boutique.

Yet that niche -- the site's chat rooms carry names like "hot tub" and "wild room" -- could be the IPO's undoing.

"The vice aspect of an adult site will probably affect investors' interest," said David Menlow, president of IPOFinancial.com.

"You might not like that the revenue is a bit seedy."

If the innocuous Classmates.com $132 million IPO, canceled in December 2007, couldn't fly, FriendFinder's is a much longer shot, Sweet said.

But analysts said the deal's biggest red flag is its sole underwriter, Moscow-based Renaissance Capital. According to Thomson Reuters data, Renaissance Capital has never underwritten a U.S. deal.

"This is a wild card and it kind of scares me," Menlow said. "Right now, investors don't need any unknowns."

Mainstream underwriters tend keep away from businesses such as the adult industry and on-line gambling that could tarnish their image.

"When a company files without a well known underwriter, it's generally because they can't find someone willing to attach their name for fear of liabilities and social responsibility," Sweet said.