Kinder Morgan Inc.'s initial public offering Feb. 11 was the most hopeful sign yet that IPO markets are warming to sponsored companies. At $2.86 billion, the Houston pipeline operator's debut was the largest buyout-backed IPO on record at Dealogic and Thomson Reuters.
That it came within three weeks of a strong showing by media analytics company Nielsen Holdings BV -- its $1.89 billion float clocked in as second-largest ever -- added to the near euphoria. Both priced above range and kept their upward momentum on the first day of trading.
The long-run reality may be less sanguine. These were singular events attributed to qualities unique to each company. Overall results for PE-backed companies are more mixed. Dutch medical devices maker Tornier BV and MedQuist Holdings Inc., a medical documentation services company, both priced below range.
Analysts cite pent-up demand for high-quality assets but also point to pricing pressures for issuers saddled by debt and performance issues. "Companies with good growth prospects, strong cash flow and manageable debt will be able to go public, but those with uncertainties hanging over them or too much debt will struggle to get things done," says Renaissance Capital LLC's Nick Einhorn.
Last year 70% of PE-backed IPOs priced below expected midpoint, Einhorn says, though aftermarket returns weren't bad, averaging 21%.
Nielsen's €8.9 billion ($9.7 billion) LBO by an investor consortium was among the supersized deals at the market peak. Formerly VNU Group BV, the New York company is billed as the world's largest television market research provider.
Unlike other megabuyouts that have roller-coastered, Nielsen's is a growth story marked by steady cash flow, says Steven Miller, managing director at Standard & Poor's Leveraged Commentary & Data. Total enterprise value has grown since the 2006 LBO, which was priced at a multiple of 9.2 times adjusted current-yield Ebitda. The IPO, which priced above range at $23 a share, valued Nielsen at a lofty 11.6 times, including debt. Total debt stood at $8.57 billion as of Sept. 30.
Sponsors AlpInvest Partners NV, Blackstone Group LP, Carlyle Group, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners LP didn't sell shares at the IPO. Their unrealized 75% stake is showing a 1.5 times return multiple on their $4.4 billion of equity.
Most PE-backed IPOs over the past 14 months have raised money primarily to pare debt tied to LBOs. Kinder Morgan used much of its robust cash flow to pay off debt tied to its $22.4 billion buyout in May 2007 by a group that included Goldman Sachs Group Inc.'s private equity arm and Carlyle. Kinder has retired all its LBO debt and some of the legacy debt, a notable feat given the size of the LBO.
Instead of piling on debt, the company used internal cash to pay a total of $1.35 billion in special dividends to investors, including co-founder Richard Kinder, through 2011. A further $820 million is projected for 2011, filings say. Its stock boasts a dividend yield of about 4%.
The sponsors booked a 192% partly realized profit on $5 billion equity. Their remaining stake is valued at $26 billion.
Kinder Morgan is the general partner and 11% owner of Kinder Morgan Energy Partners LP, a listed master limited partnership that holds the operating oil and gas assets and produces the bulk of the GP's income. It has no real public comparables, since 90% of the cash flows come from GP and LP interests in KMEP, says CreditSights Inc. senior analyst Andrew DeVries. "All other owners of GPs in pipeline MLPs have significant other assets."
Perhaps one other big-ticket IPO in the queue stands a chance of success: hospital operator HCA Inc., which has posted double-digit Ebitda growth since 2007 and reduced debt. Chipmaker Free-scale Semiconductor Inc., which has had financial troubles since its $17.6 billion LBO in late 2006, may also have better luck this year, after an IPO by rival NXP Semiconductors NV tanked. Chip markets have recovered, and NXP's stock has doubled since its November IPO.
Less promising are prospects for those with declining cash flow or the highly leveraged, such as Toys "R" Us Inc., Energy Futuring Holdings Corp. or Caesar's Entertainment Corp., which pulled its filing last year. Like selling your house, the trick is getting the price right. Says Einhorn: "Public investors are being price sensitive and feel like they have buying power in today's market." -- David Carey and Lisa Ward contributed to this column.