Recent IPO Flops Loom Over Boise Cascade Deal
There’s a surefire recipe for IPO disaster circulating on Wall Street this spring: Take a quick private equity turnaround, mix in lots of debt and award most of the proceeds to the prior owners.
Those have been the ingredients in some of the market’s biggest initial public offering flops lately, and investors are wondering whether they’re going to be served another indigestible helping this week in the form of Boise Cascade Co.
The Boise, Idaho-based paper and wood products producer is scheduled to sell its stock in an initial public offering that has some unsettling similarities to recent deals that haven’t gone well.
The businesses that make up Boise Cascade were purchased in October by Chicago private equity firm Madison Dearborn Partners and are being flipped into an IPO less than a year later.
There’s plenty of debt hanging over the balance sheet from the buyout. When the new stock hits the market -- Boise is hoping to sell 16 million shares at $24 to $26 apiece -- the money won’t go to the company but to the current owners.
As a side treat, Boise’s IPO is being served up by underwriter Goldman Sachs Group Inc., which was behind two of the biggest pricing disappointments recently: Lazard and Warner Music Group Corp.
It’s hard to blame investors for being leery about Boise’s deal, given the climate for pricing similar IPOs lately.
Warner Music, which put the majority of the money it raised toward debt and special dividends to its private owners, hasn’t closed above its offer price of $17 a share since the day it started trading. Neither has Lazard, whose $25-a-share IPO was structured primarily to buy out its private owners.
Boise Cascade’s IPO does have some redeeming characteristics that Warner’s offer lacked, said Francis Gaskins, president of IPODesktop.com. The cyclical timber products industry is enjoying a period of strong pricing, which helped Boise swing from a net loss in 2003 to net income in 2004. In the first quarter of 2005, income from continuing operations rose to $32.7 million from $2.1 million last year.
Warner, by contrast, went public as music sales were on the decline.
There are indications that the price tag for Boise’s IPO isn’t as far-fetched as some recent flops. If Boise sells at the midpoint of its projected range -- $25 a share -- it will trade at 11 times its 2004 earnings, in line with competitor Weyerhaeuser Co.
Warner’s initial pricing target of $22 to $24 a share was described by a Sanford C. Bernstein analyst before its pricing as “utterly out of line with reality.”
