The Year Ahead for IPOs

“This is almost a biblical opportunity to reap gains and sell,” claimed Apollo Group’s Leon Black last April at the Milken Institute Conference. He went on to say that “the financing market is as good as we have seen it. It’s back to 2007 levels.” The rest of the year held true to Black’s observation, becoming a near-record year for PE-backed IPOs, following closely behind the market’s peak in 2007.

Among the wave of private equity portfolio companies that came to the market in 2013 were Dollar General (KKR), Antero Resources (Warburg Pincus), Quintiles Transnational Holding (Bain and TPG), SeaWorld Entertainment (Blackstone), Endurance International Group Holdings Inc. (Warburg Pincus and GS Capital Partners), Pinnacle Foods (Blackstone), and The Container Store (Leonard Green & Partners). Thanks to the rising stock market, valuations were often higher than the PE firms anticipated.

There have been a number of signs pointing to an IPO resurgence in 2014. Mike Rogers, global deputy private equity leader at EY, notes that “the growing backlog of investments with longer average holding periods translates into a growing number of operationally im- proved companies” ready to be sold. Combine this supply with a receptive stock market and “you have a great IPO year,” Rogers adds.

Fueling the IPO market have been low interest rates and an expansionary monetary policy, according to University of Florida professor Jay Ritter, who tracks IPOs. With the Dow up more than 20 percent and Nasdaq up around 30 percent for the year, taking the opportunity to recapitalize makes sense, he says. The pipeline for IPOs shouldn’t dry up anytime soon, in Ritter’s view, given the substantial capital that buyout groups have invested in companies.

The revival in the stock market also helped drive a 55 percent increase in the value of follow-on offerings from 2012. In part, this reflects a growing number of PE-backed companies, higher stock market valuations as well as the sale of smaller stakes at the time of listing. According to Ritter, “the median float of buyout-backed IPOs in 2013 was 22.6 percent, which is the lowest in at least a decade and down from the peak of 36.6 percent in 2005.” And in his view, this is in response to “higher valuations, as the issuer is able to raise the same amount of capital by selling a smaller percentage.”

Will They List?
Which of these notable PE-backed portfolio companies will lift off from the IPO deck in 2014? We profile 10 private-equity owned companies, which, assuming no unforeseen dips in the market or economic shocks across the globe, will likely target an IPO.These firms have a few things in common that make them good candidates:

• A relatively long holding period by their PE owners (on average, over seven years)
• Eight out of the 10 had planned earlier IPOs, and more than a few had been on a dual track to either be sold via trade sale or taken public
• A heavy debt load (on average, more than $3 billion)—and hence a top priority for use of proceeds
• Six of the 10 have more than one owner—suggesting club deals may not be conducive to getting to the market quickly

SILVER LINING
After shelving an earlier attempt, could it be Aleris Corporation’s year to float?

Beachwood, Ohio–based Aleris Corporation, a global aluminum-product manufacturer and recycler, has had a turbulent history and attracted more than a few private equity investors. Having passed on an earlier public offer ing attempt, Aleris and its majority owner, Oaktree Capital Management, are hoping for continued strength in the stock market and recovery in commodities markets.

In 2006, Aleris was taken private by TPG in a deal worth $3.3 billion. In 2009, with the onset of the global financial crisis, the company filed for bankruptcy. In May 2010, Aleris emerged from bankruptcy with the help of a $1 billion debtor-in-possession financing from its new owners, Oaktree Capital Management (59.7 percent), Bain Capital’s Sankaty Advisors (21.4 percent), and Apollo Global Management (18.9 percent).

The company was formed in 2004 with the merger of one of the country’s biggest aluminum producers, Commonwealth Aluminum, with one of the biggest recyclers, IMCO Recycling. Aleris is a global leader in the production and sale of aluminum rolled and extruded products, recycled aluminum, and specifications alloy manufacturing. For the nine months ended September 2013, Aleris generated revenues of $3.3 billion and reported a loss of $8 million.

Aleris is in a highly cyclical and capital-intensive business. When it filed for an IPO in 2011, it indicated that it planned to use the proceeds from the IPO to fund operations and invest in facilities in China. Access to permanent capital would help provide financial stability, refinance the firm’s $1.2 billion in long-term debt, and give owners liquidity.

Originally planned for 2011, then moved to 2012, then shelved, a 2014 Aleris IPO would be particularly timely for Oakwood, which has been looking to cut its majority stake. Back in 2012, the pricing for the $500 million planned offering put the firm’s market value around $1.7 billion. Last May, Dutch aluminum products maker Constellium NV went public. It was 32 percent owned by Apollo.

IN POLE POSITION
Only legal action stands in the way of Formula One going public.

The only thing standing in the way of a big payday for CVC Capital Partners and other owners of London-based Formula One (F1) is the legal fate of its 83-year-old chief executive, Bernie Ecclestone. As one of the world’s greatest sports and media franchises, F1 is a highly sought-after property. Yet the legal battles of Ecclestone, over an alleged bribe at the time of the sale of an interest to CVC, could derail a lucrative IPO.

In 2006, London-based CVC purchased more than 60 percent of Formula One from the family trust of Ecclestone and three banks: JP Morgan, Lehman Brothers, and German lender BayernLB. In 2011, CVC sold a 21 percent stake in the racing group for $1.6 billion to Waddell& Reed, Norges Bank, and BlackRock. CVC retains a 35.5 percent stake in the company, and at 21 percent, Waddell& Reed holds the second-largest interest. The estate of Lehman Brothers is the next-largest owner with a 15.3 percent stake. Bambino, the family trust of Ecclestone, holds 8.5 percent, and Ecclestone himself has 5.3 percent.

Formula One Group holds the rights to commercially develop the FIA Formula One World Championship, which has been held each year since 1950. This includes the right to stage and promote events, to sell broadcast footage, and to offer sponsorship and hospitality packages. The majority of the group’s revenue comes from fees paid to host and televise F1 races, which have grown in popularity and in number. Revenues for 2012 were estimated to be more than $2 billion, thanks to multimillion-dollar contracts with groups such as BSkyB and BBC.
CVC has refinanced F1’s debt several times and has returned around $3.7 billion to its investors from dividends. Most recently, in July 2013, it refinanced a $2.5 billion loan to reduce borrowing costs.
F1 is in a strong economic position, given it is a rare global sports property with a strong and growing worldwide appeal. As the company has a number of interested buyers, healthy revenues, and relatively low debt, an IPO will provide F1 increased cachet and permanent capital.

A 2014 IPO would follow CVC’s attempt last year to float the company in Singapore, in a deal that was expected to raise around $2.5 billion. Weak markets were said to derail those plans. This time around, markets have improved, but the dark clouds over the man dubbed “F1 supremo” threaten what could be Singapore’s biggest 2014 IPO.

FEELING BETTER
Debt-financed acquisitions mean Aptalis Pharma’s owners are likely to list the drugmaker.

Bridgewater, New Jersey–based Aptalis makes drugs to treat gastroenterology and cystic fibrosis. It is approaching its sixth year as a TPG portfolio company in an industry that has seen a flurry of private equity M&A activity. An IPO would help pay down debt, finance R&D, and create permanent capital. With a number of potential suitors, a trade sale is also possible.
In 2008, TPG Capital took Axcan Pharma Inc. private in a transaction valued at $1.3 billion. In 2011, Axcan combined with Netherland’s Eurand, a global specialty pharmaceutical company, to become Aptalis Pharma. TPG is an active participant in the pharma industry, picking up generics maker Par Pharma for $1.9 billion in September 2012.

Aptalis has manufacturing and commercial operations in the U.S., Canada, and Europe and markets more than 40 projects in more than 50 countries. In the first nine months ending June 30, the company had revenues of around $530 million. With a number of its major products off-patent, Aptalis’s business is vulnerable to competition from generic drug manufacturers.
Aptalis carries a heavy debt burden, following the company’s mainly debt-financed acquisition of Eurand. In September 2013, it arranged a $1.25 billion loan to refinance debt and pay a $400 million dividend to TPG. Paying down its debt, providing additional liquidity to its owners, and financing R&D investment are at the top of its use-of-proceeds list.

After its efforts to sell the company earlier in 2013 fell through, in October Aptalis appointed bankers to prepare the company for an IPO. TPG’s reported $4 billion price tag was thought to be high for potential suitors such as Sun Pharmaceutical Industries and Salix

HOPING FOR MOMENTUM
A heavy debt burden is among the driving forces behind a Momentive Performance Materials listing.

Momentive Performance Materials is a world leader in specialty chemicals and materials and is one of Apollo Global Management’s many bets in the cyclical chemical industry during the global financial downturn. Columbus, Ohio–based Momentive is made up of two separate operations—Momentive Performance Materials and Momentive Specialty Chemicals—with the latter an add-on that Apollo combined with its original investment in 2010.

In 2006, Apollo Management LP purchased Momentive General Electric Advanced Materials for $3.8 billion. The deal included former GE joint ventures of GE Bayer Silicones and GE Toshiba Silicones. In 2010, Apollo combined Momentive with Hexion Specialty Chemicals Inc., a resin maker it formed in 2005 through a merger of Borden Chemical, Resolution Products, and Bakelite.

Momentive Specialty Chemicals Inc., which serves the global wood and industrial markets, saw its third-quarter 2013 total revenues increase six percent to $1.25 billion. The materials side of the business, which manufactures silicone, silicone-based derivatives, quartz, ceramics, and other specialty materials for industrial applications, also saw a six percent increase in sales on the year prior, to $604 million in the quarter.

In addition to providing an exit for Apollo, an IPO or sale would help to pay down Momentive’s rising debt load, which hit $7 billion for the combined operations at September 2013. Additional capital is also necessary for future consolidation plays and for competing with chemical giants such as Dow Corning and Wacker Chemie, which are much less levered.
An IPO attempt in 2014 would be Momentive’s second try. In April 2011, it filed for an $862 million listing, but withdrew it in August 2012. The prime culprit was “anemic global economic conditions.” The slowly improving economic outlook suggests this may be the year for Apollo to cash in on the industry’s up cycle.

READY TO CLEAN UP
After some shelved attempts at going public, Europe’s recovery means an ISS listing could be in the pipeline for 2014

The long-awaited IPO of integrated-facility services provider ISS A/S is anticipated for 2014. With a few previous attempts to list and two failed trade sales, ISS’s majority owners know the script. A public listing would take the company, Denmark’s second-largest, to the next phase of its global expansion.

ISS was taken private by Goldman Sachs Capital Partners and EQT in 2005 for about $3.9 billion (€2.9 billion). In August 2012, Ontario Teachers’ Pension Plan and KIRKBI Invest A/S invested €500 million for a 26 percent interest. Certain members of the board and executive management hold about one percent. The 2012 investment valued ISS at €5.8 billion including debt, with the proceeds used to pay down debt.

ISS operates in more than 50 countries, providing cleaning, maintenance, security, catering, and property services for commercial buildings. With weak growth and difficult macroeconomic conditions in Europe in recent years, the company has pushed into emerging markets. Revenues for the third quarter of 2013 were €2.6 billion, down 3.6 percent from a year ago.

ISS is committed to deleveraging and putting in place a simpler stable long-term capital structure. It has made partial redemptions with proceeds from divestments. In early 2013, ISS refinanced US$4.1 billion in loan facilities, which are now due in 2018. Paying back debt and providing liquidity for investors are key drivers for going public.

ISS is no newcomer to the listing process. In 2007, IPO plans were dropped and an $8.2 billion IPO in 2011 was pulled when U.K. rival G4S made an offer, which fell apart. So did a €6.5 billion follow-up bid from Apax. With a recovering European economy and a stronger balance sheet, an estimated £5 billion (€6 billion) float looks likEly.

COMMODITY CONUNDRUM
Could a debt refinancing be enough to unearth mining services group Barminco’s buried IPO?

The IPO stars are lining up for Western Australia–based mining services company Barminco Ltd. With an improved balance sheet, fewer problem contracts, and a shift away from its lackluster domestic market, the firm’s prospects of tapping the public investors should be better than its 2010 attempt. However, the renewed confidence is tempered by falling commodity prices and an uncertain outlook for the mining industry.

In a management buyout valued around $200 million, Sydney-based Gresham Private Equity bought a 70 percent stake in Barminco in August 2007, with Peter Bartlett, the firm’s founder, holding the remaining 30 percent stake. Gresham is backed by Australia’s largest conglomerate, Wesfarmers Ltd., but with only three portfolio companies and no plans for a new fund, it may have a limited life in private equity.

Established in 1989, Barminco’s primary underground mining business, in gold, copper, silver, and nickel, has been in Australia. With the domestic market peaking, the company has made a big push to diversify into West Africa, South Africa, and Egypt. Today almost 20 percent of Barminco’s A$825 million in revenue flows from Africa, and its sights are on Southeast Asia and Latin America.

As a highly levered private-equity-backed firm in a capital-intensive business, Barminco has more than a few uses for a capital infusion. Addressing the firm’s A$400 million in debt was part of the motivation for the US$545 million IPO planned for in 2011, which fell through.

With the refinancing of its debt, Barminco addressed one of the issues which forced it to pull its 2011 planned IPO. The turnaround in the global IPO market should address weak market conditions. And how well KKR’s planned end-of-year IPO of its mining service company BIS Industries fares should reveal investor sentiment for the sector.

IN RECOVERY MODE
Biomet could be among 2014’s biggest medical device sector’s IPOs

Warsaw, Indiana–based Biomet, a medical engineering company, could become one of the largest IPOs of the medical device sector if a suitor doesn’t step up beforehand. The four mega-buyout groups which purchased the company in 2007 have grown the business and are looking to exit. As Biomet’s global businesses continues to recover in line with the IPO market, the timing looks good.

In 2007, the private equity consortium of Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, and the Texas Pacific Group took Biomet private, paying $11.4 billion. They were joined by one of Biomet’s founders, Dane A. Miller.

Founded in 1977, Biomet went public in 1982 and made a number of acquisitions that enabled it to enter new markets. In the recent fiscal half year, 56 percent of the firm’s
$1.5 billion in revenues came from the large-joint reconstruction business, followed by 19 percent from sports, extremities, and trauma. The company is challenged by a slower European market and legal issues around one of its hip replacement products.

Fresh capital from an IPO would help pay down the firm’s $5.9 billion in debt and provide liquidity for its four owners. Maintaining high R&D spending to drive product innovation is seen as essential to gain market leadership, and acquisitions remain a key vehicle for gaining market share.
Biomet is expected to follow a dual-track strategy of preparing for an IPO but of also being shopped to potential buyers. An earlier analysis suggested that an IPO may yield a value higher than Alcon’s $2.5 billion raised in 2002, which would make it one of the largest in the medical device industry in the past 20 years.

COMMUNICATIONS TITAN
Capital concerns make Avaya a candidate for listing in the coming 12 months

Avaya, the Santa Clara–based telecom equipment and communications giant, has experienced a few financially difficult years. But after numerous acquisitions to broaden its product base, the company is on the IPO path. A high debt burden and fierce competition are driving the need for permanent capital, and the failure to close a merger with Oracle in 2013 makes a public offering the next-best attractive option.

In 2007, Silver Lake and TPG Capital took Avaya private for $8.4 billion, the largest leveraged buyout of a computer networking company at that time. The deal was expected to give what was then the world’s biggest maker of corporate phone network equipment the ability to better innovate and compete with Cisco Systems Inc. in the market for Internet-based systems.

In 2000, Lucent spun off its enterprise communications group that became Avaya and later that year went public. After going private in 2007, Avaya bought a string of startups and has been aggressive in launching new products. The company’s sales, which hit $1.15 billion in the third quarter of 2013, are split roughly equally between products, such as phones and video-conferencing devices, and services for the communications networks of companies.

With more than $6 billion in long-term debt and about $2 billion of that coming due in 2017, Avaya has a serious need of fresh capital. In addition, its higher debt levels put it at a disadvantage against competitors that have stronger balance sheets. With Avaya soon to hit its seventh year as a portfolio company, its owners Silver Lake and TPG are keen for an exit.
Avaya’s owners have looked at exiting a few times. In 2011, the company filed for a $1 billion IPO, about 20 percent of the firm. The offering was taken off the table. In the first half of 2013, Avaya held discussions with hardware and software giant Oracle about a deal, but the talks fizzled.

TOYING WITH THE MARKET
Some hurdles remain if Toys ‘R’ Us is to be the next retailer to go public

As Toys ‘R’ Us limps into the 3Q with a loss, the Wayne, New Jersey–based Toys ‘R’ Us’s decision on whether to pull the trigger on the long-awaited IPO of an early high-profile “club deal” is likely to turn on the performance of holiday sales. Last March, the world’s largest specialty toy chain nixed an earlier IPO attempt, given its leadership vacuum and deteriorating sales. With disruptive competitive and technology forces continuing to shake up the retail sector, the pressure to exit is high.

Toys ‘R’ Us first went public in 1978 and was taken private in 2005 by an investment group that included Bain Capital Partners, KKR & Co., and Vornado Realty Trust. Diverging interests have created challenges. Vornado, whose goal was to monetize the real estate value of the stores, has been more pressed than others to exit early.

Founded in 1948, Toys ‘R’ Us has grown to become the nation’s largest toy retailer with 877 Toys ‘R’ Us and Babies ‘R’ Us stores and more than 685 international stores. During the past 10 years, it has seen new competition in the form of big-box retailers such as Walmart and online competitors such as Amazon.com. New CEO Antonio Urcelay faces a highly competitive global toy market in which the U.S. business, valued at $22 billion, grew just two percent last year.

In 2010, when it was first preparing to launch an IPO, the company said it would use the targeted $800 million offering to retire debt, which today stands at around $5 billion. A lower debt burden would free up capital to expand internationally and remodel U.S. locations.

Last year saw a number of planned or executed PE- backed IPOs of retail companies. The price of the Container Store offering in November more than doubled on its first trade day, and luxury retailer Neiman Marcus was bought by two PE groups before its IPO was launched. Strong holiday sales and a rebound in fourth-quarter results could see Toys ‘R’ Us get swept up in early 2014 IPO activity.

MEATY DEAL
Debt and an offshore expansion are adding weight to the likelihood of a Shuanghui International Holdings listing

Shuanghui International Holdings, the Chinese meat processor, is poised to make a $6 billion splash on the Hong Kong stock exchange in mid-2014. With the $4.7 billion purchase of Smithfield Foods last summer, the company’s increased debt load is becoming an important IPO catalyst. The offering would also help ramp up the group’s international expansion.

The top three owners of Shuanghui are: (1) CDH, one of the China’s longest-established private equity funds, which owns about one-third of the company; (2) Heroic Zone, a vehicle owned by senior management and staff, which owns another third; and (3) the Kerry Group, which has a stake of just over seven percent. Other owners include Goldman Sachs, with about five percent; New Horizon, a Chinese private equity firm set up by the son of Wen Jiabao, China’s former president, which owns about 4.2 percent; and Temasek, the Singaporean sovereign wealth fund, with almost three percent.

Using joint ventures as well as offshore and onshore entities, Shuanghui’s chairman, Wan Long, engineered a management buyout in 2010 that freed the company from state ownership. The purchase of Smithfield, the world’s biggest hog producer, will allow Shuanghui to directly sell the Virginia-based company’s pork products in China, one of the world’s biggest pork markets. The company will also gain an array of brand names, as well as food and safety knowledge, which it can leverage in its home market and throughout Asia.

Paying back debt and refinancing the Smithfield deal, as well as providing liquidity for owners to exit, are the primary uses of IPO proceeds. Both the Shuanghui and Smithfield operations have limited dividend-paying capacity, so servicing additional long-term debt is not a viable option. Paying back CDH, which financed the Smithfield acquisition, is said to be a top priority.

As an IPO is likely to command a higher value at an exchange closer to its home market, the Hong Kong stock exchange is likely beat out New York. The IPO could be a record-setting Hong Kong deal, as the combined value of Shuanghui and Smithfield is estimated at around $20