May 15, 2010 / 12:25 AM / 8 years ago

IPO View-U.S. IPO market suffering from weak cos

* U.S. IPO market suffering from poor quality companies

* IPO returns should significantly beat indexes-analyst

* Next week’s IPOs have mixed prospects-analyst

By Clare Baldwin

NEW YORK, May 14 (Reuters) - While a rocky stock market is one reason for the U.S. IPO market’s recent struggles, equity underwriters and the quality of the companies they bring to market bear much of the responsibility.

Overly ambitious valuations as well as a surfeit of private equity-backed offerings into which the owners have been trying to sell have been scaring away many investors, analysts say.

As a result, a growing number of deals are being canceled, delayed or re-priced.

Canadian communications company Mitel Networks Corp (MITL.O), for example, filed to price at a premium to competitors Alcatel-Lucent SA ALUA.PA and Cisco Systems Inc (CSCO.O). The IPO priced 26.3 percent below the expected range and lost an additional 12.1 percent on its debut. Shares are now trading 17.8 percent below their IPO price.

Chinese oil company MIE Holding Corp (MIE.N) sought a valuation ahead of some competitors. Shareholders including private equity affiliate TPG Star Energy Ltd -- which had held its stake for less than a year -- were planning to sell some of their shares.

The company delayed the offering, slashed its value by 60 percent and said no current shareholders would sell in the IPO. After U.S. markets took a sudden plunge last Thursday, the company canceled its IPO.

Shares in metals service center Metals USA Holdings Corp (MUSA.N) in which private equity firm Apollo Management LP [APOLO.UL] sold a portion of its stake are now trading 25 percent below their issue price.

“The point is that investors are looking for positive returns and it’s not enough to beat the market with IPOs. Investors really want to make money on them,” said Nick Einhorn, an analyst with Connecticut-based Renaissance Capital.

“What we saw in 2008 was that when markets were falling even though IPOs weren’t doing that badly relative to the markets they still weren’t trading up -- and that was enough for the market to basically shut down,” Einhorn said.

To date, IPOs have posted average returns of about 2.4 percent, according to Thomson Reuters data. The Russell 3000, one of the broadest measures of publicly traded companies in the United States, is up about 3.03 percent, year-to-date.

In one example of the market’s problems, and some solutions, Noranda Aluminum Holding Corp NOR.N, backed by Apollo, was the best performing debut in recent weeks. Its shares surged 10 percent by the end of the day, but the company had to make major concessions to eke out the gains.

Noranda, which smelts and refines aluminum and mines bauxite, sold 10 million shares for $8 each on Thursday, raising about $80 million. But that was nearly 70 percent less than it was originally planning on.

    The IPO price was also slashed from an initial range of $14 to $16 each. Apollo, which originally planned to sell 2.5 million shares in the offering, decided not to sell any shares in the IPO.

    Apollo declined to comment.


    “The overall IPO market has been very lackluster,” said Darren Fabric, a managing director at IPOX Capital Management. “You’re not getting compensated to take risks.”

    There are other signs all is not well in the U.S. IPO market. Only three are on the calendar for next week -- compared with seven that were scheduled for this week -- and Morningstar analyst Michael Gaiden said none presents a completely compelling picture.

    Accretive Health Inc AH.N, which provides revenue management services to healthcare companies, hopes to raise about $200 million. The company posted net services revenue of $125.94 million in the three months ended March 31, up 12 percent from a year earlier. It swung to a $314,000 profit from a $638,000 loss. But a single customer, Catholic nonprofit healthcare company Ascension Health, accounted for about 60 percent of its net revenue.

    Nearly all of the major shareholders are selling a portion of their shares, a move analysts say could create investor backlash.

    Radiation detection and monitoring company Mirion Technologies Inc MION.O hopes to raise about $176 million. But nearly all of the proceeds from the offering are going to private equity owner American Capital Ltd ACAS.O, which also plans to sell part of its stake.

    The third firm going public, Internet marketing company ReachLocal Inc RLOC.O, hopes to raise about $75 million. The company is in a high-growth industry -- online advertising by small and medium businesses -- but most of its business depends on Google Inc (GOOG.O). When Google ended a rebate program at the end of 2008 ReachLocal saw an uptick in its expenses. (Reporting by Clare Baldwin, additional reporting by Rodrigo Campos; Editing by Gary Hill)

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