Last week was another week marked by slack and lackluster demand in the IPO market. Every single deal, aside from Pure Storage (PSTG), had to be priced at a significant discount versus the initial IPO filing price range to attract enough investor interest and be able to make it out through the door.
Despite a very strong week in the market, with one of the biggest rallies since 2011, investors remained cautious and their risk appetite subdued. They are demanding bigger discounts on IPOs in order to take on the extra risk that comes with the newly listed companies.
The price cuts ranged from 20% to 40% versus the initial valuation offered by underwriters on these IPOs; a solid business, the CPI Card Group (PMTS) IPO was priced at $10 (it was originally filed with a $16-$18 indicative price range, a very steep cut). As I mentioned in the column last week there lies the opportunity with “cold” deals at times, and it was no different for PMTS as it could have been easily bought around $11 where it opened for trading before quickly hitting $13.
The Digicel IPO had to be outright cancelled for lack of demand even after talk of lower pricing. Of course anything with a tag related to emerging/frontier markets (Digicel, a caribbean cell network operator) is being shunned by investors along with other more risky assets. So it didn’t come as a surprise.
What came as a surprise and another glaring sign of the poor health and liquidy in the IPO market currently, was the aftermarket trading in Pure Storage (PSTG). While the deal was brought by the most solid team of underwriters and reportedly well oversubscribed (which usually means a strong aftermarket performance as investors complete their positions by buying shares in the aftermarket), the stock was priced in the middle of the range at $17. It opened under the Initial Public Offering price and was under pressure all day, ending the day at $16, the next day the stock kept being sold hitting a low of $15.50 before recovering somewhat on Friday.
Note that after-hours on Friday Jim Cramer gave PSTG one of his enthusiastic endorsements sending the stock higher into Monday’s trading.
Regardless of the questions about Pure Storage profitability, valuation and competitive landscape going forward, if this deal had been brought to the market just 3 months ago in June or July (with a great story and all the attributes of a successful “hot” IPO – fast revenue growth and cutting edge technology), this deal would likely have been up 30 to 50% on the first day of trading. This goes to show how far the sentiment has shifted and liquidity tightened in a short period.
Put together with BOX and ETSY, the performance of PSTG is raising some questions regarding the ability of the “unicorns” to find their way into the public markets with sky high valuations that have been anchored in the private market. All the while, public market investors look at these ventures with increasing skepticism and waning appetite for the IPOs.
This Week In IPOs
Looking forward, this week will be another test of investor demand for IPOs, but this time for another type of assets: some big established businesses sold by private equity sponsors seeking liquidity for their investment.
Scheduled to price this week, two big private equity backed companies, Albertson’s (ABS) to raise $1.6 billion (Sponsor: Cerberus Capital Management) and First Data Corp (FDC) to raise $3 billion (Sponsor: KKR), making it potentially one of the biggest weeks of the year in terms of dollars raised. Earlier this month, on October 1st, another big private equity backed deal, Performance Food Group (PFGC) sponsored by Blackstone, managed to make it to the public market, raising $275 million. While the deal struggled to attract strong demand and had to be priced well below the initial $22-$25 range at $19, it was met with some buying in the following days and traded back above $22.
Generally, I am not a big fan of private equity exit type deals, as I never really want to be on the receiving end of what so called “smart money” is selling. That said, I have to admit that in recent years, while there has been some busts, a number of these private equity exit deals have been priced right and have done very well. A few that comes to mind LYB, NXPI, NCLH and more recently PLAY.
It will be an important gauge for the IPO market to see how these 2 very big deals, ABS and FDC, are received by the market and if they manage to price within the valuation originally seeked with the initial filing range.
And they pave the way for another big IPO deal, one of the most anticipated IPOs of the year: the Ferrari IPO.
Ferrari (Ticker: RACE) is expected to price its IPO on Tuesday, October 20, and start trading on Wednesday, October 21st. This week Ferrari will be on the road promoting its IPO to institutional investors during its roadshow, promising to be the hottest ticket in town wherever it stops. Ferrari will be in New York on Monday 10/12 hosting a lunch in the rooftop ballroom of the St Regis, in Boston on 10/14, at the Dorchester in London on 10/15, in Milan/Maranello on 10/16 and finally on the West Coast in LA/San Francisco on 10/19. UBS which has been a long term sponsor of Formula 1 is the lead underwriter for the IPO.
While one may be balking at the sticker price on the Ferrari IPO as it seeks a valuation as high as $12 billion (for reference the whole Fiat-Chrysler group that brings in $120 billion of revenues trades at a $20 billion market capitalization, Ferrari had revenues of $2.8 billion in 2014. You can read the SEC prospectus here.
2 other points of reference – While smaller and not as profitable, Lamborghini changed hands in 1998 for less than $100 million and Aston Martin for about $800 million in 2012.
The deal will likely be an easy sale as the aura of the brand and the desire from investors of all types around the world (from US retail, growth funds to Middle Eastern sovereign funds) to own a piece of this unique iconic luxury asset regardless of price, will generate more than enough demand to cover the relatively small 17.2 million shares deal. Ferrari will be the main attraction next week.
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