Dole IPO takes a bruising

(breakingviews.com) -- Dole Food's initial public offering didn't go so well. The world's largest fresh fruit and vegetable company priced its deal below the anticipated offering range -- it then promptly wilted.

Among other concerns, investors appeared worried about Dole's debt, which relative to rivals is high. Its performance may serve as a warning to private equity firms hoping to unload assets still lumpy with leverage.

Dole (DOLE) looked set to have a decent return to the market. Its revenues have fallen recently, but EBITDA increased. An economic recovery should help boost fresh produce sales. Plus Dole has paid down debt since it was bought out by its chairman David Murdock in a heavily leveraged $2.5 billion deal six years ago. And it had planned to use cash from the offering to de-lever more.

But investors were still skeptical. Some of this was due to other noise around the offering. Murdock was personally also simultaneously selling an unrelated convertible bond deal, which may have confused investors. But that only added to the concerns investors already harbored about Dole's capital structure.

Even after the IPO, Dole has debt nearly four times its earnings before interest, tax, depreciation, and amortization. That's more than 50% higher than the leverage levels at rivals like Del Monte and ConAgra Foods. Last year its interest expense ate up a third of its EBITDA. If sales of its branded produce don't rebound, there won't be much left for shareholders to harvest.

As a result, Dole had to cut its IPO price to $12.50, 17% below the top of the range. And the shares fell to as low as $12.03 in early trading. This performance could be a fluke borne of the confusion of Murdock's convertible sale.

But it may also be an omen for the many buyout firms plotting IPO exits for some of their portfolio companies. They may need to restrain their expectations of investors.