Stock Sales Climbing to $78 Billion Highest Since 1996Whitney Kisling
Public companies are taking advantage of record U.S. equity prices to sell the most stock in 17 years, even as initial offerings slow.
Thermo Fisher Scientific Inc., Dollar General Corp. and HCA Holdings Inc. are among U.S. corporations that offered $78 billion in shares during 2013, according to data compiled by Bloomberg. They’ve completed 334 secondary offerings, the most since 1996. IPOs are down 31 percent to $19.9 billion, the lowest since 2010, the data show.
Bears say the increase is the result of distortions caused by Federal Reserve stimulus and shows that private-equity firms and chief executive officers see little chance that prices will go much higher. Bulls say the IPO slowdown means markets haven’t become too frothy. Secondary offerings last peaked in 1996 and 2004, right in the middle of multi-year rallies as economic growth accelerated, according to data compiled by Bloomberg.
“Stocks are going to get overvalued as rates rise, so the smart money starts to sell now, which is why you see private equity selling shares, insiders selling shares and companies selling shares,” Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said in a June 20 phone interview. “If you are an investor, you end up thinking, if the smart money is selling, should I really be buying?”
U.S. stocks tumbled the most since 2011 on June 19 and 20 after Fed Chairman Ben S. Bernanke said the central bank may slow its bond-buying program in 2014 if the economy achieves criteria set by policy makers. More than $4.4 trillion of global share value has been erased since May 21 as Bernanke raised the prospect of tapering. That compares with the $30 trillion created in the last four years.
The MSCI All-Country World Index slipped the most in 21 months, including a 4 percent decline for emerging markets on June 20. Yields on 10-year Treasuries surged to 2.5 percent on June 21, the highest since August 2011.
Companies sold stock this year as the S&P 500 rose as much as 17 percent to a record 1,669.16 on May 21, the best start since 1974. About half of the offerings involved private equity firms or other stakeholders, Bloomberg data show. The S&P 500 fell 1.2 percent to 1,573.09 at 4 p.m. New York time today.
HCA Holdings announced a $1.8 billion sale by KKR & Co. and Bain Capital LLC earlier this year. Existing shareholders sold $1.75 billion of Dollar General stock. Thermo Fisher’s $2.53 billion sale this month will be used to fund its Life Technologies Corp. acquisition.
Coty Inc., the maker of perfumes by Beyonce Knowles and Heidi Klum, and SeaWorld Entertainment Inc., the theme park operator, are among 78 companies that have priced IPOs in 2013. The $19.9 billion raised compares with almost $30 billion at this point in 2012 and 2011, according to data compiled by Bloomberg. The 78 deals this year compare with an average of 146 for the last two decades.
Companies that have completed IPOs this year have rallied about 22.4 percent, data compiled by Bloomberg show. New shares gained an average of 42 percent in the six months after their offerings last year, according to data compiled by Bloomberg.
Additional share sales have come as the advance enters its fifth year and price-earnings ratios for S&P 500 companies climbed above the six-decade average of 16 last month. With the bull market matching the average duration of past rallies since 1945, companies may be trying to raise money before it fizzles, said Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., which manages about $85 billion.
“They’re thinking, we might be topping out here, and prices of their companies are at or close to all-time highs,” Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg, which manages about $85 billion, said in a June 20 phone interview. “If you’re going to do it, you want to do it while the market’s hot.”
Share sales are increasing this year because firms have been waiting for valuations to come back to normal, according to Joe Castle, the New York-based head of global equities syndicate at Barclays Plc.
The S&P 500 traded at an average of 9.8 percent below its five-decade average price-earnings ratio for the last two years, according to data compiled by Bloomberg. Valuations increased as analysts boosted profit predictions for 2014 and 2015 and economists forecast gross domestic product will accelerate next year.
The U.S. economy has expanded every quarter since the middle of 2009, recovering from the worst recession in seven decades. Sales of previously owned homes in the U.S. climbed last month to the highest level in more than three years. Manufacturing expanded in June, reports last week showed. While the unemployment rate at 7.6 percent remains above the five-decade average of 5.8 percent, it’s down from a 26-year high of 10 percent reached in October 2009.
“As the market has rallied, volatility has remained low and we’ve reached a point now where companies are more open to using equity for acquisitions or to fund growth,” Castle said in a June 19 phone interview. “A stronger economy is going to be good for stocks and earnings. We’re at a very good spot on the equity issuance cycle.”
Past peaks in secondary offerings came during equity market rallies. In 1996, after the S&P 500 had more than doubled since October 1990, 341 companies sold more shares, the most for the first half of a year since at least 1970, according to data compiled by Bloomberg. The advance became the biggest bull market on record, lasting 10 years and producing a 417 percent return, data compiled by Bloomberg show.
More than 260 public corporations sold stock in 2004 as the economy expanded 3.5 percent. The S&P 500 was in the second year of a 102 percent advance that went on for five years and pushed the benchmark gauge to a record 1,565.15 by October 2007.
“I don’t think anyone should read into this as an overall negative sentiment about the market,” Bob McCooey, senior vice president for Nasdaq OMX Group Inc., who oversees relationship management for listed companies, said by phone June 19. “The markets have done well and people have gotten more confident in the turnaround of the economy, so they are willing to pay higher prices for assets.”
Shares of companies that sold additional shares this year have declined a median of 4.6 percent since announcing the offering, data compiled by Bloomberg show. ArcelorMittal is down 31 percent since the world’s biggest steelmaker said in January it would raise $3.5 billion in equity and convertible notes to pay down debt. Williams Partners LP dropped 3.3 percent since a more than $600 million offer on March 4.
Private-equity firms, seeking commitments for new investment funds, are selling to provide returns to current limited partners, according to Frank Maturo, New York-based vice chairman of equity capital markets at Bank of America Corp. Many of the companies offering shares were taken private during history’s biggest leveraged buyout boom, when about $1.6 trillion of deals were completed from 2005 to 2007, according to Preqin Ltd., a London-based research firm.
“Many financial sponsors are fundraising and want to show returns to their investors, but in addition, given some macro uncertainty and volatility, they also feel valuations are attractive to monetize some of their position,” Maturo said in a briefing on June 20.
The price-earnings ratio for HCA, the largest for-profit U.S. hospital chain, reached 22 by the end of 2012, about a month and a half before it announced a group of existing investors were selling 50 million shares. That compares with 11.9 when the stock made its debut in March 2011, data compiled by Bloomberg show. HCA has underperformed a group of S&P 500 health stocks by 8 percentage points since the sale.
TRW Automotive Holdings Corp. rallied twice as much as the S&P 500 in the 12 months before announcing a 10 million share offering Feb. 20. The gains sent the biggest vehicle-safety equipment maker’s valuation to a two-year high. Shares have underperformed the S&P 500 by 1.9 percentage points since then.
Since announcing March 27 that 30 million shares would be sold, Goodlettsville, Tennessee-based Dollar General fell 1.5 percent, compared to the S&P 500’s 1.9 percent increase. Cobalt International, the oil explorer in the U.S. Gulf of Mexico and West Africa, fell the most in more than four months May 8, when Goldman Sachs Group Inc., Carlyle Group LP and other backers sold 50 million shares at a discount to the previous day’s price. The stock fell 3.4 percent since then.
Thermo Fisher, the second-biggest maker of life-science equipment by market value, announced the $2.53 billion sale in additional shares this month. Even though the Waltham, Massachusetts-based company is using the proceeds to buy Life Technologies, a maker of DNA-sequencing equipment and laboratory materials, the stock has fallen 3.6 percent, 2.5 percentage points more than the S&P 500, since the June 5 announcement.
At the same time companies are issuing more stock, they are slowing the pace of repurchases, which surged during the early parts of the bull market. So far this quarter, 206 companies announced buyback plans, the fewest since the three months ending June 2010, and about 18 percent less than last year’s average, according to data from Birinyi Associates Inc., in Westport, Connecticut.
Insiders are also cutting holdings. Corporate officers and directors sold $7.7 billion in May, the most since May 2011, according to corporate filings compiled by TrimTabs Investment Research Inc.
“The market got frothy,” Peter Sorrentino, who helps manage about $14.7 billion at Huntington Asset Advisors in Cincinnati, said in a June 21 phone interview. “Better to exit now than wait for the disappointment to hit.”
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