May 17th 2005 -
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WASHINGTON, May 16, 2005 -- There's a surefire recipe for IPO disaster circulating on Wall Street this spring: Take a quick private-equity turnaround, mix in lots of debt, and award most of the proceeds to the prior owners.
Those have been the ingredients in some of the market's biggest initial public offering flops lately, and investors are wondering whether they're going to be served another indigestible helping this week in the form of Boise Cascade Co.
The Boise, Idaho, paper and wood products producer is scheduled to sell its stock in an initial public offering that has some unsettling similarities to recent deals that haven't gone well.
The businesses that make up Boise Cascade were purchased in October by Chicago private-equity shop Madison Dearborn Partners LLC, and are being flipped into an IPO less than a year later.
There's plenty of debt hanging over the balance sheet from the buyout. When the new stock hits the market - Boise is hoping to sell 16 million shares at $24 to $26 apiece - the money will go not to the company, but to the current owners.
As a side treat, Boise's IPO is being served up by underwriter Goldman Sachs Group Inc., which was behind two of the biggest pricing disappointments recently: Lazard Ltd. and Warner Music Group Corp.
It's hard to blame investors for being leery about Boise's deal, given the climate for pricing similar IPOs lately.
Warner Music, which put the majority of the money it raised toward debt and special dividends to its private owners, hasn't closed above its offer price of $17 a share since the day it started trading. Neither has Lazard, whose $25-a-share IPO was structured primarily to buy out its private owners.
Investors have been particularly skittish about deals that involve quick exits by private investors, as was the case in Warner Music and satellite operator PanAmSat Holding Corp., which went public at $18 a share in March, promptly sank, and took six more weeks to begin trading above its offer price.
"I call them boring bailouts of junk stock," said Francis Gaskins, president of IPODesktop.com. "This is a current version of corporate raiding, except it's buyout raiding. It's a different way to destroy a company, by ruining the balance sheet."
Boise Cascade's IPO does have some redeeming characteristics that Warner's offer lacked, Gaskins said. The cyclical timber products industry is enjoying a period of strong pricing, which helped Boise swing from a net loss in 2003 to net income in 2004. In the first quarter of 2005, income from continuing operations rose to $32.7 million from $2.1 million in the same period last year.
Warner, by contrast, went public as music sales were on the decline, and had a negative tangible book value going into its IPO.
There are also indications that Boise's IPO's price tag isn't as far-fetched as some recent flops. If Boise sells at the midpoint of its projected range - $25 a share - it will trade at 11 times its 2004 earnings, in line with competitor Weyerhaeuser Co.
Warner's initial pricing target of $22 to $24 a share was described by a Sanford Bernstein analyst before its pricing as "utterly out of line with reality."
Boise's outcome will depend on whether IPO investors can forget the stomach-churning similarities in deal structure and instead focus on the strength of the underlying paper and wood products business, say observers.
"It remains to be seen" whether Boise's IPO will receive the market drubbing that some recent large offerings have suffered, said Sal Morreale, who tracks IPOs for Cantor Fitzgerald LP in Los Angeles. "The recent failures of Lazard and Warner Music don't bode well, but this is a market of very individualized deals. (Investors) are very hip to valuations on deals."
Copyright 2005 Associated Press, All rights reserved
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