IPO 2009: Testing the waters
It's hard to get excited after last year's drought, but four new companies are hoping investors won't be shy.
NEW YORK (Fortune) -- After a barren U.S. market last year, four companies will test investor appetite for initial public offerings next week.
A children's food maker, a renewable energy company, a real estate investment trust and a homeland security group are all expected to hit the street next week. Together, they could raise nearly $940 million.
As the economy chilled in 2008, the number of companies that went public froze. The last U.S. deal to hit the market, Grand Canyon Education, brought in $144 million last November. It was the only IPO in the fourth quarter, a dismal end to 2008, during which the number of IPOs declined 83% from 2007 to 43.
The current drought is the second-longest on record, and the number of withdrawn or postponed IPOs increased 62% to 120 in 2008 from 74 deals in 2007, according to data tracker Dealogic.
Despite some optimism from the federal economic stimulus package in Congress, the IPO outlook for 2009 remains bleak. According to Dealogic, just 31 deals are looking to raise $7.5 billion in the current 180-day SEC registered backlog. At the same time last year, 146 IPOs expected to raise $43.7 billion.
Analysts say the market will start to thaw if the initial round of IPOs is successful. "People will want to see how they price and perform," says Mary Ann Deignan, head of equity capital markets in the Americas for UBS. "If you see nice trading and reasonable valuations come out in this first class, then you will start to see more companies come to market."
Deignan says investors will remain cautious in 2009, but some will spend if the opportunity is right. "There really aren't very many people on the buy side who have said to us 'don't show me any IPOs,'" she says. "But everyone has said 'I need a good clean company, I need a clean balance sheet, I need visibility, I need good valuation, I need a reason to believe that I'm not taking a silly risk.'"
Timothy Monfort, head of equity capital markets at Jefferies, expects public offerings to reemerge in the second half of the year, but warns that investors will be especially cautious about putting money into unproven businesses with many blue-chip stocks available at steep discounts. "When the IPO market comes back and the flow is more steady, it will be driven by best-in-class, larger companies," Monfort says.
Mead Johnson may fit Monfort's bill. The century-old company is a wholly-owned subsidiary of biopharmaceutical giant Bristol-Myers Squibb (BMY, Fortune 500) and did $2.6 billion in sales in 2007 making the baby formula Enfamil and other nutritional products for infants.
The IPO is expected to raise $563 million with an initial price range of $21 to $24. If successful, it would be the largest U.S. IPO since American Water Works raised $1.25 billion in April 2008.
The other three companies don't have the same pedigree as Mead Johnson. Changing World, which transforms waste from animal and food processing into renewable diesel, isn't yet profitable, losing $19.9 million on sales of $589,000 in 2007. The deal aims to raise $32.75 million with a stock price of $11 to $15.
Still, Changing World's alternative energy play fits with a hot topic on Wall Street: the nearly $900 billion federal stimulus package in Congress. Billions of dollars in government spending and tax cuts are slated for alternative energy, and companies like Changing World could get increased tax breaks and other incentives.
Changing World wouldn't comment further, but the company has already received a $1-per-gallon renewable diesel federal tax credit, according to its Securities and Exchange Commission filing.
"This massive infusion of money...may encourage some companies to go out," says Mark Heesen, president of the National Venture Capital Association, but he notes that investors are still wary of relatively unproven businesses even in sectors that stand to benefit from stimulus dollars like clean tech, broadband, and life sciences.
Real estate investment trust Madison Square Capital (MSC) and homeland security focused O'Gara Group will also test investor interest for their industries.
MSC invests in agency-backed residential mortgage securities like those issued by troubled lenders Fannie Mae and Freddie Mac. Despite the mortgage-centered financial crisis, the company was recently formed by Highland Financial Holdings, a mortgage and asset-backed securities financial firm. At about $15 a share, MSC plans to raise about $200 million from the IPO.
"Existing real estate investment trusts all have pretty bad portfolios. Madison Capital will bring a clean slate and diversification," says Francis Gaskins, editor of IPODesktop.com. "All they're doing is cherry picking from government-backed securities. There's no risk."
The last of the IPOs expected next week is the O'Gara Group, which is expected to raise about $144 million with an estimated price of $17 to $19 a share.
The company focuses on the homeland security market, making products like armored vehicles and night vision goggles, and providing urban warfare and other training services. O'Gara will acquire three companies simultaneous to the IPO for $232 million: armored-vehicle suppliers Isoclima (Italy) and TPS Armoring (Mexico), and OmniTech (U.S.), which makes night-vision goggles. The company posted a loss of $2.8 million through Sept. 30 2008, according to a Jan. 12 SEC filing.
Regardless of how investors take to O'Gara and the other IPOs next week, the outlook for 2009 is uncertain. "Hopefully in the second half of the year we'll see something that feels like it's a more steady stream," says Deignan of UBS, emphasizing the importance of general market stability for IPOs in 2009.
"But a lot of it is going to depend on underlying economic conditions, which I'm not going to opine on as my crystal ball is not as good as it used to be." 
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