Olaplex (NASDAQ:OLPX) just had a unique IPO on Sept. 30. The IPO price of $21 resulted in a huge capital raise of $1.78 billion from the sale of OLPX stock. However, as opposed to almost every other IPO there is, this capital raise is going straight to the pockets of the existing private equity owners, the Advent Group.
That’s right. None of the proceeds from this IPO go into the bank account of the Santa Barbara hair products company. This is very clear from both the prospectus and the follow on statement from the company that an “over-allotment” of additional shares were sold at $21.00.
Where This Leaves Olaplex
This is how private equity companies operate. They are all unanimously 100% out for themselves. So, for example, the public will own just 11.4% of the company now that it’s public. It is still controlled by Advent with a 78.7% stake in the post-IPO company, according to a chart on page 12 of the prospectus.
But it’s not like Olaplex doesn’t need to have some of that money. It is deep in debt. It has $766.808 million in debt, according to page 20 of the prospectus, and just $76.43 million in cash. That leaves it with $690.378 million in net debt.
Moreover, the company had $38.6 million in interest expenses during 2020 and $31 million as of the first half of this year. That represents an annualized rate of $62 million in forecast interest for 2021.
So, Olaplex might have been able to receive some of the proceeds from the IPO. This is not uncommon with IPOs where there is a selling shareholder. As a result, public shareholders might own a stake in a company with lower interest expenses going forward.
But it is very uncommon for a selling shareholder in an IPO to grab all the proceeds, especially when the company is deep in debt.
And by the way, the debt was mostly as a result of huge dividend payments that Olaplex paid its shareholders, mostly Advent International, the private equity fund. Page 9 of the prospectus indicates that in December 2020 a $470 million distribution was made to the owners, including $350 million in debt (the rest from cash resources).
So, even if half of the proceeds of the IPO were made to the company by issuing new shares it could have paid off all of its debt. This would have lowered interest expenses significantly enhancing the profits, and thereby justifying the present valuation of OLPX stock.
Where This Leaves OLPX Stock
The stock of this profitable hair care products company now has a market value of $16.1 billion. And as I said, it has just $76 million in cash.
Sales were $270 million in the first half and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) profits were $191 million. That is a very healthy 70.7% EBITDA margin. It means that Olaplex products are extremely profitable.
Right now there are no analyst estimates available for OLPX stock. But if we assume that sales will double from the half year to $540 million, then EBITDA profits could reach $382 million.
As a result, Olaplex trades at a 29.8 times 2021 price-to-sales (P/S) multiple ($16.1 billion / $540 million). As its EV (enterprise value) is equal to its market cap plus net debt, it is at $16.79 billion. This puts the EV/sales multiple at over 31 times. That is a very high multiple. It would have been lower if the debt had been paid down.
Moreover, the EV/EBITDA multiple is also high at 44 times ($16.79 billion / $382 million). This is extremely high.
Too bad shareholders won’t be able to benefit from any of the IPO proceeds to help lower these stratospheric multiples.
What To Do With OLPX Stock
What is really going on here? I suspect that the company will likely do a secondary offering of equity sometime in the next several months. That way the debt can be paid down. This might have been the plan all along. But of course, the private equity fund has to get the first and only grab at the IPO money. That is the nature of the kind of controlling shareholder they are.
As a result, this stock should not have so high a valuation. The market is not dumb. It will see through the actions of the private equity fund. It will value the stock appropriately, no matter how profitable the underlying company turns out to be.
As a result, most astute investors will wait for OLPX stock to take a big drop. It is likely to be 50% lower or more within the next six months, especially if the company does a secondary equity offering.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
