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IPO market rolls on
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November 10, 1997: 12:46 p.m. ET
Global telecom offerings spearhead a crowded $12 billion season of deals
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NEW YORK (CNNfn) - Despite worries that October's stock-market turbulence might have dried up the initial-public-offering market, the fourth quarter could see as much IPO activity as the second and third quarters combined.
Equity underwriters have more than $12 billion of deals slated to go public before the new year, and 216 IPOs valued at nearly $20 billion set through early 1998, according to research firm Commscan Equidesk.
Although underwriters launched the same number of deals in fourth-quarter 1996, the dollar values involved are bigger -- underwriters are seeking 25 percent more capital than they did in the same period last year.
Telstra IPO to raise some $8.8 billion
IPOs don't get much larger than an upcoming offering involving Telstra, Australia's government-owned telephone company.
The Australian government expects to raise US$8.8 billion by selling 30 percent of Telstra -- making the IPO the largest ever in Australia, as well as the second largest worldwide this decade.
To underwrite the Telstra deal, the Australian government has recruited ABN AMRO Rothschild, Credit Suisse First Boston and J.B. Were & Son.
Nine out of ten Australian calls pass through Telstra's network, making the company one of the country's best-known brand names.
Telstra also dominates the Australian mobile-phone carrier market -- one of the most highly penetrated in the world -- with a 62 percent market share.
But whether Telstra can keep that share in the face of new domestic competition (which only came into existence earlier this year) remains to be seen.
Telstra sales have grown steadily in the past several years, climbing to US$11.6 million for the fiscal year ended June 30.
However, operating profits fell by 58 percent to US$857,000, or US$1.33 per share, as the company paid down some credit lines.
Should Telstra's IPO price at $44 a share -- the midpoint of the deal's filing range -- the company's stock would have a multiple of 33 times earnings in an industry where the average is only about 25.
While that appears rich, experts note that Telstra plans to pay out 60 percent of its after-tax profits in dividends.
Hungary's Matav also going public
Another upcoming telecommunications IPO involves leading Hungarian telecom company Matav, which plans to offer just under 17 million shares in a deal expected to raise $827 million.
Credit Suisse First Boston is underwriting the IPO, expected to price at between $18.45 and $21.39 a share. Merrill Lynch is serving as the offering's lead banker.
Matav stock involves very different risk/reward considerations than Telstra's does.
Most importantly, Hungary does not yet have a fully deregulated telecom market, with Matav enjoying full exclusivity rights until the year 2002.
Matav also has backing from two leading phone providers, Ameritech and Deutsche Telekom, which together will own 60 percent of the company.
On the downside, Hungary faces the volatility and uncertainty common to most emerging markets.
Is market hot for Friendly's Ice Cream?
For those who prefer to invest in a more-familiar name closer to home, U.S. restaurant chain Friendly Ice Cream Corp.'s IPO is pricing this week.
Having been around for three generations, Friendly's could easily market itself as a piece of nostalgia. Given the ample scoops of debt left over from a leveraged buyout of the company, such a strategy might not hurt.
Fortunately, Friendly's debt load apparently hasn't left a bad taste in investors' mouths.
Solid demand has pushed the stock's initial price up by 5 percent to between $20 and $21 -- levels that mean the offering should raise a total of $105 million.
Friendly's plans to use proceeds from the IPO to retire some debt as part of a larger recapitalization that should slice interest expenses by more than half.
However, Friendly's, which operates more than 650 restaurants, hasn't proven it can grow revenues at any substantial rate.
The company posted $665 million in sales in its latest fiscal year -- up a mere 9 percent from 1989 levels.
The good news is that Friendly's might soon reverse a steady stream of net losses, and that many investors currently view small-cap stocks favorably.
"There is a window of opportunity (for small caps)," said Satya Pradhuman, who follows small-cap issues for Merrill Lynch. "Small caps are relatively inexpensive compared to big caps, and have been trading at 1.1 times cash flow, when on average they should trade between 1.3 to 1.4 times."
Pradhuman added that overseas investors are increasingly drawn to Wall Street's small-cap stocks, as smaller issues offer equity exposure to U.S. niche businesses that players can't find anywhere else.
--by Bambi Francisco for CNNfn Interactive
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