by Tom Taulli | September 11, 2013 2:28 pm
Stock markets remain in bull mode, investors are taking on increasingly higher risk, and Wall Street seemingly can’t devour IPOs fast enough … making now a pretty time to go public.
But the current environment does not necessarily mean any company can come public. There are some deals that just can’t get done.
For one, many investors still have scars from the financial crisis and even back to the dot-com bust, and thus are focused only on offerings that have viable businesses and sustainable growth. However, there’s also a number of companies with businesses that are so strong, management really doesn’t care about the prospects of an IPO.
Thus, while we’ll see a number of companies go public in the next couple years (or until the bull market disintegrates), there are a few — such as these — that almost certainly will remain on the sidelines:
The ubiquitous toy retailer was the subject of an ill-fated private equity deal back in 2005, when KKR (KKR), Bain Capital and Vornado Realty Trust (VNO) bought it out for $6.6 billion.
Even back then, Toys “R” Us was struggling, as it was forced to fight against discounting from increasingly influential players like Walmart (WMT) and Target (TGT), as well as Amazon.com (AMZN).
Toys “R” Us tested various strategies, including pop-up stores, exclusive merchandising and an improved website, but they did little to stop the deterioration of the business.
In 2010, Toys “R” Us did file for an IPO, but it got little interest. In March 2013, Toys “R” Us announced a slip in sales from $5.9 billion to $5.8 billion and a 30% deeper net loss of $239 million. So it was no coincidence, then, that the company also pulled the filing the same day.
In 2007, KKR, TPG Capital and Goldman Sachs (GS) pulled off a $48 billion buyout of TXU Energy, which later became Energy Future Holdings. It was the largest leveraged buyout ever, but also one of history’s worst — and now it looks as if the company could be on the verge of bankruptcy.
Energy Future had a storied history, reaching back to 1882. The company would eventually become the biggest owner of power plants in Texas, with a customer base of about 3 million.
However, the PE firms believed Energy Future would benefit from deregulation. This calculation was proved to be erroneous amid the collapse of natural gas prices, which made the company’s coal-based energy much less competitive.
True, Energy Future still generates healthy cash flows ($3.7 billion in 2012). But keep in mind that this has been the result of hedging contracts. When they expire next year, cash flows will plunge, and it probably will be impossible to meet the debt obligations — meaning the private equity investors could potentially lose everything.
Even famed investor Warren Buffett, whose Berkshire Hathaway (BRK.B) owns a slug of low-rated bonds, could take a hit.
Koch Industries is the second-largest privately held company in the U.S. with about $115 billion in sales, and its interests run the gamut, from chemicals to ranching.
Fred Koch, who created an innovative system for refining crude oil, co-founded the company in 1940. His sons Charles and David bought out their brothers in the early 1980s for a mere $1.1 billion, and now own and operate the company.
Koch has never been publicly traded, and really, that’s no black mark. The company has plenty of resources to pull off major acquisitions — and did so this week, snapping up Molex (MOLX), a top components supplier to operators like Apple (AAPL), for $7.2 billion.
In fact, Charles Koch is no fan of public markets. In a Bloomberg article, he said quarterly earnings were “pernicious.” Instead, he thinks being private allows his companies to focus on investments that produce sustainable gains.
So far, so good.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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