Maybe it was all in the name for Harrah's Entertainment Inc. In November 2010, the Las Vegas casino and hotel operator, citing market conditions, pulled its plans for a $531 million initial public offering. At the time, Harrah's had nearly $19 billion in long-term debt on its books, mostly due to its 2008 leveraged buyout by TPG Capital and Apollo Global Management LLC. The private equity firms paid $5.9 billion in equity for the company and loaded on an additional $12 billion in debt to its existing $12 billion. Such high leverage is rarely attractive to public market investors.
A week after it canceled the IPO, Harrah's changed its name to Caesars Entertainment Corp. as part of a strategic rebranding. Not a bad idea, given that Harrah's was not only weighed down by debt, but was losing money, and lots of it. While Ebitda had more than doubled between 2004 and 2007, to $2.5 billion, it crumbled during the recession as consumers cut discretionary spending. Ebitda was a loss of $3.6 billion in 2008 and a loss of $607.8 million in 2009.
Nearly two years after the name change, the gaming conglomerate, led by CEO Gary Loveman, finally went public in February as Caesars Entertainment. Though Ebitda was back in the black at $1.3 billion for 2010, overall, little else had changed at the rebranded company. It still held around $19 billion in debt and competed in an industry whose future remained as uncertain as the economy's. But the offering was well received, pricing in the middle of its range and nearly doubling in the first day of trading. And while it has since given back some of those gains, Caesars has been trading in recent weeks between $12 and $14 a share, up 30% to 50% from its debut.
Was it the name change? Probably not. More likely, it was the unique structure of Caesars' IPO, in which the company sold only 1.8 million of its 125 million shares for $9 each, reaping $13.1 million in post-expense proceeds. The unusually small share sale not only boosted demand, but helped Caesars become a noteworthy exception to the rule apparently governing IPOs by PE-backed companies this year -- that to succeed, sponsor-backed companies must use their IPO proceeds to pay down debt, or, better yet, have very little debt in the first place.
Indeed, Midwestern grocery chain Roundy's Inc., backed by Willis Stein & Partners and other private investors, used some of the $163 million it reaped from its February IPO to pay down a portion of its $876 million in debt. A week before it priced its offering at $8.50 per share, Roundy's refinanced all of its existing debt, which also likely aided its offering. The stock has since steadily traded up to around $11.50 a share, a 35% hike.
Similarly, both Apollo-backed Rexnord Corp., a machinery and equipment manufacturer, and Advent International Corp.-owned Vantiv Inc., a payments processor, used the proceeds from their March IPOs to pay down debt. Each of them have seen their shares rise by about 20% since they went public.
Then there are the successful IPOs of luggage and briefcase company Tumi Holdings Inc. and mac and cheese giant Annie's Inc. The companies had little debt on their books when they went public in April and March, respectively. Tumi soared to $26 in its opening day of trading on April 18 after pricing at $18 per share, above its range. While it's traded down recently to around $25 a share, the stock is still up nearly 40%. Most of the proceeds went to the owner, London private equity firm Doughty Hanson & Co., as Tumi has only $64 million in debt and $32.7 million in cash on hand, not to mention 2011 net sales of nearly $330 million and adjusted Ebitda of roughly $72 million.
Solera Capital LLC-backed Annie's, meanwhile, surprised everyone when it priced at $19 a share and doubled in its first day of trading, March 28. Annie's had only $13.3 million in outstanding debt, compared with $14.6 million in adjusted Ebitda. Like Tumi, Annie's can use its IPO cash to not only pay back its sponsors but to reinvest in its business for growth -- an option not as easy for a debt-laden company such as Caesars.
"Those types of companies with levered balance sheets tend to not be very fast-growing companies," says Nick Einhorn, an analyst with IPO research firm Renaissance Capital LLC. "Certainly, there are extra risks with the leverage. Some investors may be very wary."
Tumi and Annie's had other factors going for them, aside from their low debt loads, when they made their market debuts. Tumi's high-end luggage and other goods appeal to the kind of wealthy consumers who continued to spend money throughout the economic downturn. It has posted a 17% annual growth rate in operating income since 2005. Meanwhile, Annie's, whose products are marketed as homegrown and organic, has benefited from consumers' shift toward a more healthful diet. It saw its sales double between 2007 and 2011. Both companies are seen as having good prospects for future growth.
Of course, heavy debt loads have not stopped sponsor-backed companies from going public. Allison Transmission Holdings Inc., owned by Carlyle Group and Onex Corp., had $3.7 billion in debt when it raised $600 million in its IPO on March 15, selling 26.1 million shares for $23 each. Rather than pay down debt, the proceeds were used to pay back Carlyle and Onex, whose partially realized return is now at 60% more than the $1.5 billion in equity they invested. The stock has since traded below its offer price, at about $21 a share. Allison got a slight boost at the end of April when it reported an increase in sales, but analysts have remained bearish on the company's prospects for growth.
|Into the light||IPOs of private equity-backed companies in 2012, through April 19|
|Company||Sponsor||Priced||Set range||No. of shares (M)||April 26 price||Date priced (2012)||Raised ($mill.)||Proceed use||Outstanding debt ($M)|
|Midstates Petroleum Co.||First Reserve Corp.||$13.00||$16-$18||18.0||$15.82||Aprl 19||$220.0||Sponsors sell/pay off debt||$234.8|
|Tumi Holdings Inc.||Doughty Hanson & Co.||18.00||15-17||18.8||25.32||April 18||338.0||Sponsors sell||64.0 debt, 32.0 cash|
|Forum Energy Technologies Inc.||SCF Partners||20.00||18-20||18.9 up from 15.9||21.75||April 12||378.0||Sponsors sell/pay off debt||352.5|
|MRC Global Inc.||Goldman Sachs Capital Partners, PVF Holdings LLC||21.00||21-23||17.0||20.12||April 12||118.0||Sponsors sell/pay off debt||1,500.0|
|Erickson Air-Crane Inc.||ZM Equity Partners LLC||8.00||8-9, down from 13-15||4.8, down from 5.4||7.73||April 11||38.4||$32 mill. debt||160.0|
|Rexnord Corp.||Apollo Global Management LLC||18.00||18-20||23.6||21.51||March 29||400.0||$300 mill. debt||1,130.0|
|Regional Management Corp.||Palladium Equity Partners LLC, Parallel Investment Partners LLC||15.00||17-19||4.2||15.87||March 28||63.0||Pay off debt/sponsor payment||42.0|
|Annie's Inc.||Solera Capital LLC, Najeti Ventures LLC||19.00||16-18||5.0||39.90||March 27||95.0||Sponsors sell/pay off debt||13.0|
|Vantiv Inc.||Advent International Corp.||17.00||16-18||29.4||21.63||March 22||500.0||Debt||1,750.0|
|Allison Transmission Holdings Inc.||Carlyle Group, Onex Corp.||23.00||22-24||26.1, up from 21.7||20.50||March 15||600.3||Return 40% to sponsors||3,700.0|
|M/A-Com Technology Solutions Inc.||Summit Partners LP||19.00||17-19||5.6||20.01||March 14||105.6||Payment to Class B stockholders||No long-term debt|
|Nationstar Mortgage Holdings Inc.||Fortress Investment Group LLC||14.00||17-19||16.7||15.00||March 8||233.0||Working capital||873.2|
|Ceres Inc.||Warburg Pincus, others||13.00||16-17||5.0||14.47||Feb. 22||65.0||Corporate purposes||3.0|
|GSE Holding Inc.||Code Hennessy & Simmons LLC||9.00||8-10||7.0||12.30||Feb. 9||63.0||Pay off debt/sponsor payment/corporate||20.0 credit, second-lien|
|Caesars Entertainment Corp.||TPG Capital, Apollo Global Management LLC||9.00||8-10||1.8||13.69||Feb. 7||16.2||Corporate purposes (with sponsors selling later)||19,800.0|
|Roundy's Inc.||Willis Stein & Partners||8.50||10-12||16.2||11.69||Feb. 7||163.0||Debt||876.0|
|U.S. Silica Co.||Golden Gate Capital||17.00||16-18||11.8||17.84||Feb. 1||200.0||Pay off debt/growth||260.0|
|Source: U.S. Securities and Exchange Commission|
Then there is Caesars, whose IPO did well despite the company's debt. While the small number of shares sold certainly helped bump up the trading price, the stock also benefited from investors' apparent uncertainty over how to respond to the offering, as evidenced by uneven trading volumes. Less than 200,000 shares may trade one day, but more than 1 million the next. One source describes trading in Caesars' shares as "lumpy," possibly because investors may not yet know how to respond to the IPO's unusual structure.
Though Caesars initially sold only 1.8 million shares in the offering, other investors had an opportunity to sell more. About two dozen firms co-invested in the company alongside Apollo and TPG in 2008 and, according to regulatory filings, secured the right to sell about 12 million of their 24 million shares immediately after the offering. They must wait six months, or until around August, to sell the rest, however. Separately, another investor, hedge funder John Paulson of Paulson & Co., owns 12.4 million shares. He gained the right to sell all of them immediately after the offering.
A source says he thinks those other investors pushed for the IPO because they wanted a liquidity option. Whether or not the co-investors or Paulson have sold any additional shares has not been disclosed publicly.
TPG and Apollo won't be selling their holdings, worth 70.1% of the remaining shares, anytime soon. Agreements with Credit Suisse Group and Citigroup Inc. restrict the financial sponsors from selling any shares until 270 days after the February offering.
The two banks, which led underwriting of the initial public offering, are selling about 10 million shares on behalf of the company itself, however, in hopes of raising as much as $500 million. The use? To pay down a portion of Caesars' outstanding debt.
That fact may have piqued investor interest, but debt levels alone are not the only reason an investor will buy a company's stock. As Einhorn notes, growth is what the typical investor is looking for. And Caesars does have some growth prospects, particularly in online gaming. A debate is ongoing about whether online gambling should be made legal. If it is, that could mean substantial revenue for Caesars.