Investors rightly bypassing C3POs for IPOs

November 23, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Conventional wisdom dictates that investors have poor memories: they can be duped every few years with variations on the same financial trick. Refreshingly, the U.S. market for initial public offerings may be proving an exception. In what’s shaping up as the year of the see-through public offering — or C3PO for short — a record number of companies look set to abort market debuts as investors wise up.

That’s mainly down to the nature of the offerings they’re being asked to evaluate. Many of the biggest deals will be familiar to investors, having been taken private in leveraged buyouts not long ago. But unlike, say, General Motors, they aren’t necessarily renewed businesses. Many, like Harrah’s, are over-indebted and offer little growth. Investors are seeing through the marketing pitch.

So far this year, 121 companies aiming to raise $46 billion have pulled plans to go public, according to Thomson Reuters data. The last time so many IPOs were withdrawn was in the financial crisis of 2008, though the volume targeted then was just two-thirds of what has already been abandoned this year. This newfound discernment doesn’t mean investors should reject all private equity backed deals. Some big firms boomeranging back may be more suitable.

Take HCA, for example. In the past three years, the hospital chain has increased revenue by 11 percent, improved earnings by 20 percent and reduced debt by around 6 percent. Assuming this pace continues, HCA should create equity value over time.

That’s not obviously the case with a company like Harrah’s, whose owners last week shelved plans to raise $500 million. TPG, which took the casino group private with Apollo, claims to have radically improved Harrah’s operations. In a presentation to investors, TPG said millions of dollars of expenses have been stripped out by, among other things, reducing the number of steps a maid requires to tidy up a hotel room.

But the top line shrank in the first nine months, and Harrah’s is losing money. At the pitched price range, Harrah’s was too expensive for a company whose fortunes are so tied to the troubled U.S. economy. Investors may be prone to gullibility. And their memories can be limited. But they are sufficiently aware to see through stories that don’t add up.

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