| NEW YORK, April 22
NEW YORK, April 22 Investors looking to take
advantage of the recovering U.S. housing market have flocked to
large public offerings from industrial companies despite the
sector's high debt load and modest growth.
Propelled by a stock market rebound as well as an uptick in
private equity firms looking to exit old investments, five
industrial companies went public and raised proceeds of $1.2
billion in the first quarter, up from two companies and proceeds
of $769.5 million a year earlier, according to Thomson Reuters
Taylor Morrison Home raised $628 million in its IPO
earlier this month, while fellow builder TRI Point Homes Inc's
offering fetched $233 million in January. Other
industrial IPOs include $248 million for wood product maker
Boise Cascade Co in February.
Construction supply business HD Supply filed for a $1
billion IPO earlier this month. Other deals expected later this
year include aluminum products maker Constellium, door
manufacturer Masonite International Corp and builder William
"The reason we're seeing the industrials sector pick up is
really because of macro trends like an increased level of
confidence in U.S. GDP growth, manufacturing, and ultimately
corporate earnings," said Warren Estey, head of industrials,
metals & mining at Deutsche Bank AG's equity capital
While the buoyant equity markets have encouraged public
offerings across the board, growth-oriented investors have
generally considered the industrial sector less attractive than
tech or healthcare businesses, said Michael Santini, global head
of Deutsche Bank's industrials group.
Now IPO investors are becoming more receptive to buying into
industrials, given the cyclical recovery in housing and other
markets as well as the ability of these companies to generate
stable cash flow even in a slow-growing economy, Santini said.
That is also encouraging private equity firms to test the
IPO market to exit their industrials investments.
Buyout firms often preferred to sell these companies to
private buyers, which tend to value them at a higher price than
public markets do.
That is starting to change, though, as investors are willing
to look 12 to 24 months ahead for earnings growth, Santini said.
"Because of strong markets," Estey said, "we've heard (large
institutional investors) say they're willing to pay a multiple
that a strategic or private equity firm might pay."
Investors are looking to capitalize on a rebound in the U.S.
housing market in particular, which was hit hard by the turmoil
in the U.S. credit market in late 2007.
Low interest rates and rising rents have pushed many
consumers to buy homes, prompting investors to look for ways to
play the housing market.
Bankers also expect IPOs in industrial subsectors like
shipping and infrastructure over the next year.
"Given the U.S. markets have shown more economic resilience
than other parts of the world, combined with the housing market
recovery and the expectation for nonresidential markets, we are
having more active dialogues around industrial company IPOs this
year than in the recent past," Santini said.
These IPOs have performed well too.
Shares of industrial companies that went public this year
have risen 21.2 percent on average, compared with 9.1 percent
for the Standard & Poor's 500 Index, according to Reuters
And the performance came even though some of these companies
carried higher-than-average debt loads.
The average leverage ratio for private equity-backed
companies looking to go public stood at around three and four
times earnings before interest, tax, depreciation and
amortization within the last four years, according to data
HD Supply, however, carries a debt-to-EBITDA ratio of more
than nine times.
But some investors have not been scared off.
"The economy has been bumpy over the last five years, but
it's amazing how industrial companies have held up," said Kent
Croft, chief investment officer at Croft Leominster in
Baltimore, which has about $900 million under management.
"When you have a decent economy," Croft said, "just think
about how well these companies can do."