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IPO market lukewarm
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February 23, 1998: 12:06 p.m. ET
Uninspiring returns, REIT barrage dampen interest in initial openings
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NEW YORK (CNNfn) - Next to a red-hot stock market and the icy excitement of the Winter Olympics, IPO activity has been uninspiring at worst, routine at best. Not even the double twist of 20 new IPOs expected to raise $1.2 billion this week and a silver medal performance from one of last week's newcomers has managed to rekindle the once-fiery excitement that swept through this market.
The current apathy in the new-issues market doesn't lack for justification. The number of new companies floating IPOs this year is down 28 percent from 1997. Including a few notable exceptions, the average first-day gain for an IPO also is down compared with a year ago.
"It's slow," said Robert Natale, small cap analyst at Standard & Poor's. "You would think that, given how well technology stocks have performed, IPOs would pick up."
Still, rare gems such as DoubleClick (DCLK), a provider of Internet advertising solutions, do still make their way to the market. The highly sought-after shares priced last Friday at 17 and jumped 86 percent before closing at 26-3/4, marking a 57 percent gain on the day.
Such deals tend to raise the allure of IPOs, but they're going to remain rare in the weeks to come.
"The type of companies are not as exciting as we've seen in the past, mostly because the deals coming out are not in hot markets," said Steve Tuen, IPO analyst at IPO Value Monitor. Tuen's assessment of the companies in the IPO pipeline is lukewarm, and he doesn't expect activity to pick up until March.
Flood of REITs continues
As a case in point, 60 percent of this week's new issues are real estate investment trusts (REITs). Once considered a high-flying sector in the wake of Starwood Lodging's (HOT) headline-making buyout of ITT Corp. (ITT) in 1997, returns on the REITs are down about 2 percent so far this year.
Friedman Billings Ramsey, the investment banker that floated 20 percent of the REIT IPOs in 1997, is behind three REIT offerings this week. However, Friedman's deals have trailed overall industry performance, with the average return for their four REIT deals last year up 5.2 percent, compared with 21.8 percent industry-wide.
The largest IPO set for this week is a $300 million offering from Wilshire Real Estate Investment Trust at a filing price between $14 and $16. Wilshire invests in distressed loans and mortgages on both commercial and multi-family properties.
Chastain Capital, which also invests in multi-family mortgages and property, is set to float its shares at $15, raising $147 million.
Prime Capital Investment, which invests in office and industrial real estate space, expects to raise $270 million with a $16 IPO.
Goldman Sachs may be the top volume IPO underwriter over the past year, but over the next month, Salomon Smith Barney will be the busiest. Salomon has seven new offerings to float, three expected this week.
Salomon backs cellular shares
Celumovil, Colombia's largest provider of cellular services, will price Thursday at $14 to $16, raising $140 million. Salomon's underwriting of this deal is noteworthy because the five Salomon telecom IPOs last year are up an average 83.2 percent from the price at which they were offered, compared to a 46.7 percent average gain for all 1997 telecom IPOs.
Other attractions for the deal include a low wireline penetration in Colombia, with an average of only 12.3 phone lines per 100 people as of December 1996.
Additionally, the waiting time for a wireline connection in Colombia can range from weeks to years. Since cellular connections can be completed within a few hours, it's no wonder that Celumovil is picking up new customers at a booming rate, with 320,000 subscribers now, up more than 100 percent from 1994.
On the downside, the company isn't profitable. Tuen says that on a multiple-to-cash-flow basis, the IPO's expected price looks expensive. At close to 400 percent, Celumovil's debt-to-equity ratio also is quite high, although part of the IPO proceeds will go towards reducing that debt.
Timing a chip deal
Some say "timing is everything." Interest in a newly launched company can rise if fund managers receive big cash inflows from their customers right around the offering. It also helps if the company is in a sector like semiconductors, which are beating the overall market by better than 16 percent.
NationsBank Montgomery Securities could use this to their advantage when they price Genesis Microchip tonight. The deal is already seeing considerable demand, and is expected to price between $8 and $10, raising $25.6 million.
According to Vincent Slavin, IPO tracker for Cantor Fitzgerald, Genesis is the hottest deal for the week.
Based in Markham, Ontario, Genesis makes and designs low-cost image-scaling chips, an evolving niche segment within the chip industry. The company hopes to capitalize on new interest in digital television, the convergence of computers and TV.
As one IPO watcher noted, "There's no direct competition for [Genesis] and the market potential is huge." 
-- by Bambi Francisco for CNNfn Interactive
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