Harrah's Shows Debt Matters as Big Deals Miss IPO Rebound
Harrah’s Entertainment Inc.’s failed $531 million initial public offering in this year’s biggest week for U.S. IPOs shows buyout firms will need more than a rising stock market to sell some of their largest investments.
Harrah’s, the world’s biggest casino operator, last week became the first private equity-backed company to pull its U.S. IPO after setting a price range in six months, citing market conditions. Carlyle Group’s Booz Allen Hamilton Holding Corp., TPG Capital’s and Hellman & Friedman LLC’s LPL Investment Holdings Inc., and Aeroflex Holding Corp., owned by Golden Gate Capital, Veritas Capital and a fund run by Goldman Sachs Group Inc., all went public.
A 16 percent gain in U.S. stocks since the end of June has helped buyout firms sell shares in a dozen of their companies, with 10 trading above their IPO price, compared with less than half of those that went public in the first six months. Some of the biggest deals of the buyout boom, including Harrah’s and Toys “R” Us Inc., are still waiting. HCA Inc., which KKR & Co. and Bain Capital LLC plan to take public, earlier this month decided to pay its owners a $2 billion dividend financed with $1.53 billion in new debt.
“A rising tide floats all boats unless there’s a hole in the ship,” said Paul Schaye, managing partner of Chestnut Hill Partners, a New York-based firm that helps private-equity firms identify targets. “Investors are more discerning on the buy side. When there’s been something fundamentally done to the business, that’s when you see the upside.”
Private-equity firms pool money from investors and obtain debt to finance takeovers with the intention of divesting the companies later for a profit. Those profits typically are realized through sales to corporations or another investor, or by selling shares to the public.
Harrah’s withdrawal suggests investors are still is inhospitable to private-equity IPOs of portfolio companies that are highly leveraged or whose outlook is too dependent on the economy. The bigger companies need to prove they can still increase revenue and profits, a tough sell in a shaky economy, especially for companies geared toward consumers like Harrah’s and Toys “R” Us, said Steven Kaplan, a professor at the University of Chicago Booth School of Business.
“What do IPO investors want to see? A growth story,” Kaplan said. “If you’re one of the big behemoths, it’s hard to give them that. You need a strong economy.”
Metals USA Holdings Corp., the Fort Lauderdale, Florida- based metals processor controlled by Leon Black’s Apollo Global Management LLC, suffered one of the largest declines among private equity-backed IPOs this year, falling 35 percent since its $240 million offering in April. That compares with a 1 percent gain in the Standard & Poor’s 500 Index over the same span.
Private equity-backed IPOs have fared better in the second half as the S&P 500 rebounded. The 12 U.S. companies that buyout firms have taken public since July have gained 24 percent on average, the data show. Only one, Carlyle Group’s Coresite Realty Corp., has dropped.
General Motors Co. last week raised more than $20 billion selling common and preferred stock in the second-biggest U.S. IPO ever. The stock rose as much as 9 percent during its first day of trading.
Harrah’s, which had planned to change its name to Caesars Entertainment Corp. ahead of the IPO, was scheduled to sell 31.3 million shares for $15 to $17. The company, which was taken private by Apollo and TPG in a leveraged buyout in 2008, had more debt relative to cash flow than any private equity-backed company that sold shares this year except one, according to data compiled by Bloomberg.
Harrah’s had $18.39 billion more debt than cash at the end of September and generated $1.13 billion in earnings before interest, taxes, depreciation and amortization in the first nine months of 2010, according to its prospectus. That would give Harrah’s a net debt-to-Ebitda ratio of 12.2 over a full year, more than triple the average of 3.93 for private equity-backed IPOs this year.
Booz Allen, LPL and Aeroflex all had less than half the net debt relative to Ebitda as Harrah’s did, data compiled by Bloomberg show.
The only private-equity backed company with a higher net debt-to-Ebitda ratio that completed an IPO this year was Noranda Aluminum Holding Corp., backed like Harrah’s and Metals USA by Apollo.
Noranda, based in Franklin, Tennessee, has 15.3 times as much net debt as its Ebitda in the past 12 months, data compiled by Bloomberg show. Investors extracted a 50 percent discount on the asking price from Apollo in Noranda’s $92 million offering in May, which raised 66 percent less than the buyout firm sought.
Buyers in the IPO have since been rewarded with a 54 percent increase in the value of Noranda’s shares.
Harrah’s has “a massive amount of debt,” said Timothy Cunningham, a money manager at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $70 billion. “Generally with private equity, they take it private, they try to improve operations. But this company, they really hadn’t been private very long, there weren’t a lot of material improvements, it just didn’t look very attractive.”
Harrah’s profit before interest, taxes, depreciation and amortization fell 8.7 percent to $553.7 million in its most recent quarter on sales that were little changed at $2.29 billion.
John Paulson, the hedge-fund manager who made $15 billion in 2007 betting on the decline in subprime mortgages, won the right to be the first equity holder to register and possibly sell his stock as part of his hedge fund’s swap of debt for equity with Harrah’s. The casino company filed for the IPO in October, two months after it filed to register Paulson’s shares.
Harrah’s filed an amended registration today to reflect the potential sale of Paulson’s shares. Paulson and his affiliates may sell as much as 7.1 million shares, or 9.9 percent of Harrah’s shares outstanding, according to the filing.
None of the private-equity owners of LPL and Booz Allen sold shares in last week’s IPOs. Firms including New York-based KKR have taken companies such as Dollar General Corp. public during the past year and sold shares in secondary offerings once the stock traded up.
The S&P 500 gained 16 percent from the start of the second half through last week, as corporate profits rose and concern abated that the U.S. economy may enter a second recession. The U.S. Federal Reserve’s decision to buy $600 billion in Treasuries has helped lift asset prices.
“I think people feel they have a better handle on forward visibility now than they did at the beginning of the year as it relates to the business climate,” said Michael Littenberg, a partner at Schulte Roth & Zabel LLP in New York.
Booz Allen, owned by Carlyle Group, increased 13 percent on Nov. 17, its first day of trading after raising $238 million selling shares at $17 apiece, the low end of the price range. The stock fell 7 cents, or 0.4 percent, to $19.43 on Nov. 19, leaving it 14 percent above the offer price.
The government consulting firm’s sales rose 8 percent from a year ago to $2.71 billion in the six months ended Sept. 30. Net income more than doubled to $43 million, according to a filing.
TPG, the private-equity firm run by David Bonderman and James Coulter, and Hellman & Friedman bought about 60 percent of Boston-based brokerage firm LPL in 2005. Net income for the nine months ended September 30 more than doubled to $59.7 million, according to filings.
The owners have overseen an expansion of the business, with the number of advisers growing at an annual rate of 15 percent. The company in July agreed to acquire some assets of National Retirement Partners Inc., a consultant to retirement plan sponsors.
LPL priced its shares at $30 each, the top of its range, and the stock gained 7.2 percent on its first day of trading. The shares rose 1.4 percent on Nov. 19, closing at $32.60 in Nasdaq Stock Market trading.
Aeroflex, a maker of semiconductors and testing equipment, was taken private in August 2007. The company’s revenue increased 20 percent to $155.9 million in the quarter ended Sept. 30 and the net loss for that period narrowed to $5.8 million from $20.5 million, according to government filings.
The stock was unchanged at $13.50 on its first day of trading. Aeroflex climbed 59 cents, or 4.4 percent, to $14.09 today at 4:15 p.m. in New York Stock Exchange composite trading.
Toys ‘R’ Us
Pending IPOs include Toys “R” Us, the world’s biggest toy retailer, which filed in May to go public and has since sold loans to pay down existing debt. Proceeds from the public offering of the Wayne, New Jersey-based company would further that effort, Standard & Poor’s analysts wrote in a Nov. 19 note to clients.
Nielsen Holdings BV, owned by KKR, Carlyle, Blackstone Group LP and Thomas H. Lee Partners LP, filed for an IPO in June. The television-audience rating company, with headquarters in New York, in August raised the limit on the offering to $2.01 billion.
HCA, the hospital chain acquired four years ago in a $33 billion leveraged buyout, filed in May for an IPO to raise as much as $4.6 billion. The company said this month it plans to pay a $2 billion dividend to its owners.
So far this year, 61 companies in the U.S. withdrew or postponed initial public offerings.
Harrah’s was the first private equity-backed company to postpone or withdraw an offering after setting a price range since Americold Realty Trust, owned by billionaire Ron Burkle’s Yucaipa Cos., shelved its deal in May, data compiled by Bloomberg and Greenwich, Connecticut-based Renaissance Capital LLC showed.