Price rules in private equity refloats
Sydney Morning Herald
Monday November 16, 2009
Now that Kathmandu has floated successfully €“ as opposed to the lacklustre Myer performance and the failure of the Investa offering €“ private equity groups with retail assets are not likely to shy away from plans for upcoming listings.Archer Capital's Ascendia Retail, which owns the Rebel Sport chain, has already picked out advisers for an offering expected early next year.And there is plenty of speculation that the bookseller Redgroup Retail, owned by Pacific Equity Partners, could be gearing up for a $600 million or so float.Redgroup, the owner of the Borders and Angus & Robertson chains, has bonds that trade on the New Zealand stock exchange. Since the start of October the yield on the debt has fallen from 25 per cent to 17.5 per cent as investors bet the debt, due to expire next December, will be retired as part of a public listing.On Friday the bonds were being offered at just above the $100 face value; buyers were seeking to pay $94.435. Myer used the proceeds from its float to retire listed notes.The relative success of the Kathmandu float compared with Myer was attributed primarily to the lower earnings multiple at which it was priced.Also, Kathmandu was marketed to small cap fund managers that were happy to bid "low and hard" €“ for a lot of stock at the lower end of the range €“ because they saw it as a good growth story.It isn't only in Australia where pricing has proven critical to the success or otherwise of the latest private equity offerings. The legendary private equity group KKR was forced last week to price its $US716 million public offering of a discount store, Dollar Mart, at the very bottom of its bookbuild range, which was still nearly twice the earnings multiple of Wal-Mart.Bloomberg data shows US floats this calendar year have outperformed the benchmark S&P 500 index by only 0.1 per cent in the initial month of trading, which is the lowest margin in at least 14 years. And within the last three weeks three offerings have been pulled in the US, two of them by private equity groups.VALUE SLASHEDIt appears that Elders' recent admission that it would take until early next year €“ rather than sometime this year €“ for it and partner AWB to offload the Hi-Fert fertiliser joint venture is not the only difficulty the pair have faced in selling that asset.At the time of its recent recapitalisation Elders signalled it was fairly confident of receiving at least the $69 million book value for its share. Soon afterward, AWB completed its own recapitalisation, where it said €śstrong expressions of interest€ť had been received for the fertiliser venture, even though the division was expected to report an operating loss of $18 million to $20 million in light of the tough market for the product.A few weeks ago Elders revealed sales talks had been whittled down to one party, believed to be a Chinese group.But it seems the price being discussed is no longer in the ballpark of the $138 million suggested by Elders' book valuation. On Friday evening AWB told the market it had written down its share of Hi-Fert by a whopping $43 million to just $11 million (which also indicates Elders had a more optimistic valuation on its books previously).Soon afterwards, Elders slashed the value of its stake in the joint venture by $57 million to $10.6 million, calling the new valuation a €śconservative approach€ť.Both companies had planned to use the proceeds to repay debt, so clearly the market will have to readjust expectations about their balance sheets. Elders is also trying to sell ITC Timber to Gunns for $100 million, but has yet to receive final approval from the competition regulator.TOLLWAY LINKSIt has been more than a week since Transurban admitted it had received an unsolicited takeover bid from two Canadian pension funds, but there has been very little news since.However, the stand-off between the two sides has renewed focus on one of Transurban's rivals, ConnectEast Group.Transurban has long been considered the natural owner of ConnectEast's Eastlink tollway due to the cost savings available from combining the companies, but continuing financing and legal issues with ConnectEast have made an acquisition unpalatable so far.But that could change if Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan are able to convince Transurban to support a scheme of arrangement.As part of the scheme, the Canadians want to convince Transurban's largest shareholder, CP2, that it should vend its 14.5 per cent stake into an unlisted vehicle after the deal is completed.CP2 just happens to own a 30 per cent stake in ConnectEast. However, UBS thinks it is unlikely that CP2 has the financial capacity to fund a bid for the remainder of that company. Instead, it could use that stake as a bargaining chip with the Canadian pension funds to be vended into a privatised Transurban.TIDDLERSMost of the recent focus on floats has naturally been on the big end of the market, but there have also been several small offerings in the mining and exploration sector of late.Laconia Resources, a West Australian gold float put together by a Sydney corporate adviser, Emerald Partners, and backed by a prominent group of mining investors, is trading 15 per cent above its 20c issue price after listing a month ago.And now many of the same backers €“ including Hardman Resources founder Ted Ellyard, former OZ Minerals director Ronnie Beevor and WA prospector Denis O'Meara €“ are supporting the float of a base metals hopeful, Rubianna Resources.The $6 million offer officially opens tomorrow, but after strong interest from the private client divisions of major brokers during pre-marketing last week, there is said to be little if any remaining stock available.Rubianna's main interest is the Ruby Well project in Western Australia, which is 70 kilometres away from Sandfire Resources's high-grade Doolgunna copper-gold project that mining industry types rank as one of the most exciting discoveries in recent memory.Rubianna's offer of 30 million shares at 20c closes on November 24, and it is expected to list on December 7.jfreed@smh.com.au
© 2009 Sydney Morning Herald