IPO investors sober up as punch bowl drains

June 27, 2013

Investors have sobered up about new stock issues with the punch bowl draining. Computer retailer CDW and tool wholesaler HD Supply both were forced to slash their debut prices on Wednesday night. Until then, buyers had been lapping up initial public offerings at a pace not seen in six years. Without the intoxicating effect of ultra-low interest rates, though, revenue-free startups and heavily indebted buyouts will be harder to serve up.

The proof is in the two mega-sales. HD Supply, the onetime Home Depot division taken private in 2007 for $8.5 billion, reduced the price of its shares by nearly a fifth to below the bottom of its indicated range. A lowered price by CDW, the target of a $7.3 billion leveraged buyout the same year, wasn’t incentive enough. It wound up selling fewer shares than originally planned.

Excessive debt left both deals on the rocks. CDW and HD Supply said they’re using the new funds to pay some down, but the companies will still be leveraged by about four and seven times, respectively, the EBITDA they should generate this year using annualized first-quarter figures. That’s a lot to service in a sluggish economy, especially with flexibility waning. Higher rates only make it harder to refinance existing debt or borrow more.

Other IPOs have turned bitter for different reasons. Three speculative, cash-burning, venture capital-backed companies – ad network Tremor Video, gene profiler NanoString Technologies and animal health products maker Aratana Therapeutics – all slashed the prices of their offerings this week, too. If investors now consider the U.S. Treasury a riskier investment, it’s a relief they were even willing to consider investing in pet biotech.

Emerging market issuers also have found the markets less cordial. Brazilian cement giant Votorantim Cimentos yanked its $3.7 billion offering while IFR reports that Hong Kong’s New Century REIT, which owns stakes in mainland China hotels, plans to cut the amount it is raising by half.

Underwriters had been on track for something of a vintage year. The 90 new stocks priced in the United States is the most at this point in the year since 2007, according to Renaissance Capital. Investors, however, now seem to be looking at new issues, particularly those with no revenue, too much debt or in uncertain markets, more clearly. The IPO party may be over.

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