Despite three straight weeks of gains among broader equity
markets, US IPO investors pushed hard for discounts in the last
wave of deals before Labor Day.
Three deals priced
more than a dollar below the range; the fourth, Peregrine
Semiconductor (
PSMI
), priced at the low end in spite of hockey-stick forecasted
growth; and two more were postponed. The $567 million raised this
week was 45% less than the more than $1 billion expected, which
would have made it the biggest week since Facebook.
As in the week before, the
valuation cuts
paid off: Bloomin' Brands (
BLMN
) and Peregrine rose 17% and 6%, respectively, in their first
three days of trading, and Performant Financial (
PFMT
) gained 18% in its first day. While the largest and highest
profile deal, soccer franchise Manchester United (
MANU
), traded flat in its debut, it was forced to cut its price by
22% just to get out of the door. Since July 24, ten of eleven
deals have priced at the low end or below their anticipated
ranges, but only two have produced negative returns.
While the widespread discounting indicates a buyers' market, many
of the recent deals offered limited upside due to well-defined
peer groups, exposure to economically sensitive sectors, muted
growth prospects, significant insider selling or high perceived
risk.
Unique concepts take off
In the initial post-Facebook stretch, eight of ten deals priced
at or above the midpoint. Among these, ServiceNow (
NOW
), Five Below (FIVE) and Palo Alto Networks (PANW), up 68% on
average, each offered extremely strong organic growth and unique
concepts or products. Accordingly, investors were very flexible
in their valuation targets.
The same cannot be said of Bloomin' Brands, one of several mature
casual dining companies, and Peregrine Semiconductor, which
operates in the extremely competitive and low-visibility chip
sector. The IPO discounts may have pulled investors in, but both
companies likely lack the differentiation needed to justify
premium multiples.
Quick-service restaurant chain CKE, which postponed its deal on
Thursday, had similar problems, compounded by a significant debt
burden, substantial selling by its private equity sponsor Apollo
and negative reports from McDonald's and Wendy's. Performant
Financial's insider selling and high regulatory exposure may have
contributed to its low pricing, 31% below the midpoint.
Only one deal on the calendar for next week
In what could be the
final deal of August
, Hi-Crush Partners LP (HCLP), which produces frac sands for oil
and gas companies, will attempt to raise $225 million next week
in a deal led by Barclays, Morgan Stanley, Credit Suisse and UBS.
It plans to pay an implied 9.5% dividend.
US IPO market update
Year-to-date, there have been 90 US IPOs (down 5%
year-over-year), which have together raised $30.6 billion (up
5%). In the past week, mobile advertising platform Millennial
Media (MM) and luxury luggage brand Tumi (TUMI) have traded up
52% and 23%, respectively, in response to strong earnings reports
and 20 others have gained at least 5%, raising the average
aftermarket return from -0.2% as of last week to positive 1%. The
average total return for 2012 IPOs is 17%, ahead of most major
equity indices.
With performance holding up and the rumored volume of
confidential filings, we expect activity to pick up shortly after
Labor Day as deals push to price ahead of the presidential
election.