Penthouse parent's IPO might be tough sell

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.

FEW SEX-THEMED STOCKS

Strong interest among consumers for adult products and services has not translated into many IPOs.

One of the most famous prospective IPOs to be canned was by Nevada-based brothel operator Mustang Ranch, which in the late 1980s tried to go public with a $23 million deal on Nasdaq.

Mustang Ranch saw its plans scuttled when some states would not allow the trading of the stock because prostitution was illegal outside Nevada.

Another Nevada company, Sporting Houses Management Corp, planned to file a $32 million IPO in 1996 to fund a sexual theme park but never went public.

Those companies that are public have seen their shares swoon.

For example, Houston-based Rick's Cabaret International Inc, which operates porn Internet sites and 19 strip clubs with names like "Encounters," has seen its shares droop 80 percent in the past year, contending with what it calls an "extremely volatile" adult entertainment industry.

In 1995 Rick's become the first publicly traded topless bar chain with a $5.5 million IPO led by Barron Chase Securities Inc. It currently has a large billboard in New York's Times Square touting its status as a Nasdaq-traded company.

Perhaps more ominous for FriendFinder, even Playboy -- Penthouse's more upmarket cousin -- has taken a hit.

Playboy Enterprises Inc shares have fallen 74 percent in the past year, with revenue down 15 percent in the third quarter of 2008 and its flagship Playboy Magazine losing up to $10 million annually as consumers of pornography migrate to the Internet.

Even if FriendFinder's business is very different, investors might lump it in with those companies, making it a tough sell in a moribund IPO market that has seen investors run for the exits at any sign of trouble, Menlow said.

"Caution prevails right now -- investor confidence is in critical condition," he said.

(Reporting by Phil Wahba; editing by John Wallace)