When private-equity firms Apollo Global Management and TPG Capital launched Caesars Entertainment onto public markets, they likely didn’t take a near-doubling of the casino operator’s shares to $15.39 as a big victory. That’s because after trying for a $531 million IPO in November 2010, the buyout investors settled on an offering of just 2 percent of the company’s shares, raising $16.9 million. While Apollo and TPG didn’t sell shares in the offering and won’t in a possible 34.7 million share follow up stock sale, their still giant stake in Caesars Entertainment is indicative of how large privately held share stakes can weigh on new offerings.
As big Caesars Entertainment investors eventually look to exit the troubled $27.8 billion 2006 buyout their share sales may pressure the company’s stock, while the casino conglomerate’s near $20 billion in debt raises the prospect of share dilution.
“In general, whenever you have a large private-equity firm with a big stake, it’s going to be an overhang on shares,” says Morningstar gaming and lodging equity analyst Chad Mollman of the Caesars Entertainment offering. He adds that investors in capital raising offerings to lower debt, investors face the prospect of share dilution.
In initiating a “hold” rating and a $16 a share price target for Caesars Entertainment in a Tuesday report, Deutsche Bank analyst Carlo Santarelli noted “potential share sales by Apollo and TPG, their considerable control over the company, and the threat of further equity raises by CZR” as some of the gaming stock’s main risks. Hamlet Holdings, the Caesars Entertainment ownership vehicle of Apollo and TPG, and hedge fund Paulson & Co. hold roughly 80 percent of the company’s shares even after its IPO, according to Bloomberg data.
Overall, analysts give Caesars Entertainment shares a price target of $16.40, with two “buy” and “hold” ratings to go with a “sell.”
Caesars shares closed Tuesday trading at $12.99, putting its post-IPO drop at over 15 percent.
A recent spat between Clear Channel Outdoor Holding stock investors and the company’s majority owners Bain Capital and THL Partners highlight other private-equity industry techniques, like dividend recapitalizations and complicated ownership structures that may come as a surprise to shareholders. For more the $17.9 billion buyout of the advertising and radio giant, see why Ryan Seacrest may need to save Clear Channel.
While Caesars Entertainment’s IPO is an extreme case of a now public stock with a potentially giant private-equity overhang, its an illustration of a trend to watch as once-private companies become increasingly available to stock investors.
Here’s a look at 5 recently IPO’ed stocks that could face pressure if private-equity shareholders were to look for a speedy exit. In 2011, private-equity backed IPOs reached a post-crisis high of $38.6 billion, according to Dealogic data, as firms used recovering stock markets to realize investments. In recent reports, Alvarez & Marsal and Bain & Co. expect private-equity funds to further consider share sales as a way to return capital to investors in five-to-10-year-old funds.
5. HCA Holdings
One of the largest buyouts at the time, HCA Holdings was taken private by Bain Capital and KKR in 2006 for a total value of $33 billion. The move was the hospital chain’s second takeover after a $5.1 billion management buyout in 1988. The 2006 deal was heavily financed by lenders like Bank of America, Citigroup and Merrill Lynch, which helped raise $23 billion in takeover debt.
After struggling through the credit crunch, Bain and KKR returned HCA to stock markets in a $3.78 billion March 2011 IPO, the biggest U.S. private equity share offering ever. Prior to the IPO, Bain and KKR pulled a May 2010 offering to wait for markets to recover, choosing to use a $2 billion November debt offering to pay their investors a dividend.
When HCA’s offering hit markets at a price of $30 a share, Bain, KKR, and Bank of America saw their initial $5 billion equity investment nearly triple, as they sold roughly $1 billion worth of shares, to complement $4 billion-plus in dividends they’d pulled from the company and a remaining share stake worth over $11 billion. Stock investors haven’t fared so grandly. Since its offering, HCA shares are off nearly 20 percent to $24.67 as of Tuesday’s close, even as the company reported that its revenue grew to $32 billion and profits doubled to $2.5 billion in 2011.
Overall, HCA is expected to earn $34 billion in 2012 revenue and $1.56 billion in profit, according to analysts polled by Bloomberg who give shares an average price target of $31.68. Seventeen analysts rate HCA shares a “buy,” while eight rate the company a “hold.” If the company were to see its leverage drop from present levels, it could seek to use its cash for growth acquisitions, share repurchases or special dividends, notes Bank of America Merrill Lynch analyst Kevin Fischbeck in a Mar. 1 note.
Bain Capital holds over 89 million shares or 20.5 percent of the company’s float, according to Bloomberg compilations of Securities and Exchange Commission filings. KKR holds a 87.5 million-plus share stake representing 20 percent of HCA’s shares. In September 2011, Bank of America sold 80.2 million of its shares to HCA, in a repurchase move worth $1.2 billion. Meanwhile, roughly six years after their initial investment, Bain Capital and KKR are likely closing in on an exit strategy as the company’s shares are expected to remain at its IPO price in coming quarters.
4. Kinder Morgan
Like HCA, Kinder Morgan has had multiple stints as a private and public company, with its most recent buyout occurring in a 2006 management-led buyout valued at $22 billion that included a consortium of private-equity investors. On Feb. 11, 2011, Kinder Morgan returned to public markets in a $2.86 billion initial public offering of 95 million shares, according to Bloomberg data
Since its February IPO, Kinder Morgan has been the most aggressive player in the pipeline space, cutting a $21.1 billion deal for competitor El Paso that will help to make the company the largest transporter of gas in the U.S. Earlier in 2012, Kinder Morgan sold El Paso’s oil and gas exploration unit to Apollo Global Management for more than $7 billion, in one of the biggest post-crisis private-equity investments. However, the merger faced scrutiny on potential conflicts of interest. Still, Kinder Morgan’s ascendance into a pipeline powerhouse has been rewarded by a 20 percent stock gain since the company’s IPO.
On Tuesday Bank of America Merrill Lynch analyst Gabriel Moreen downgraded the Kinder Morgan shares to “underperform,” while lifting his price target to $33 a share — 10 percent below Tuesday trading prices — on the company’s growth prospects and a big overhang of private-equity shareholdings. “We see the $12 [billion] in private-equity ownership in [Kinder Morgan] as an overhang,” noted Moreen in his report.
Overall, Kinder Morgan is expected to earn $9.2 billion in 2012 revenue and $885 million in profit, according to analysts polled by Bloomberg who give shares an average price target of $35.50 — below Tuesday’s close of $36.75. Six analysts rate Kinder Morgan shares a “buy,” while five rate the company a “hold” and two rate shares a “sell.”
Company Chairman and Chief Executive Richard Kinder retains a 33.67 percent stake in Kinder Morgan after its IPO, or 238 million shares. Kinder and a consortium of private-equity investors that includes Goldman Sachs and The Carlyle Group, among others, owns more than 80 percent of the company’s outstanding shares, according to Bloomberg data.
After being seized by the Federal Deposit Insurance Corp.in May 2009 on concerns over the Florida-based lender’s solvency, BankUnited Financial was acquired by a consortium of private-equity funds and longtime bank investors, including the Blackstone Group, The Carlyle Group, Centerbridge Partners, Wilbur Ross, and John Kanas. The investor group took control of a bank with $12.7 billion in assets and $8.3 billion in deposits, and agreed to give the struggling institution $900 million in capital and share on potential losses with the FDIC.
After toying with an IPO for months, BankUnited went ahead with a share offering in January 2011, selling shares for $29 to raise $783 million in a sale that was reported to have tripled the consortium’s initial investment.
Since the offering, BankUnited shares have slumped nearly 15 percent, underperforming the KBW Bank Index’s near 7 percent drop. While the BankUnited’s been able to show strong loan and deposit growth compared with some super-regional competitors, the bank saw its 2011 profit fall by roughly two-thirds.
After a FDIC disclosure mandate threatened to force unwanted disclosures by the bank’s private-equity owners, BankUnited confirmed in 2012 that it had been exploring a sale, with speculation that BB&T or Toronto-Dominion Bank as potential acquirers. Instead, the company said that a sale process had “concluded,” with the company looking to remain independent. In February, BankUnited boosted its quarterly dividend by 21 percent to 14 cents a share.
“Given their pessimistic view of [mergers and acquisitions] and the failed attempt to sell the bank in January, it comes to no surprise that BKU increased its quarterly dividend,” noted KBW analyst Brady Gailey in a Feb. 29 note. He rates shares “market perform,” with a price target of $24.
Overall, BankUnited has a price target of $25.80 a share according to analysts polled by Bloomberg who give shares five “buy” ratings and four “holds.”
The bank’s five largest shareholders are private-equity funds that hold an over 50 percent stake in the Miami Lakes, Fla.-based lender. Wilbur Ross-run WL Ross & Co. and The Carlyle Group each hold 13.87 percent stakes in BankUnited shares, according to Bloomberg data.
2. Dunkin’ Brands Group
Bain Capital, the Carlyle Group, and THL Partners bought Dunkin’ Brands Group, the owner of Dunkin’ Donuts and Baskin Robbins, for $2.5 billion from French wine and spirits giant Pernod Ricard in 2005. In July 2011, the private-equity owners priced an IPO at $19 a share, giving the company a market value of $2.4 billion, however, shares spiked 47 percent in Dunkin’ Brands debut on the Nasdaq, closing at $27.85.
In the ubiquitous coffee seller’s debut share offering, the equity capital raised was used to help lower the company’s debt. However, seven years after the buyout, private-equity investors are now looking to realize parts of their investment. Earlier in March, Dunkin’ Brands said that it’s private-equity backers would look to sell as much as 25 million shares in a secondary offering, causing shares to fall from levels near 2012 highs.
Rising earnings and profitability on pricing power, and increased demand for Dunkin’ Brands coffee and specialty drinks products, may be hampered by the prospect of continued private-equity investor share sales. Meanwhile, the company’s near 25 percent year-to-date share gain puts Dunkin’ Brands at prices with little upside to analyst expectations. Overall, Dunkin’ Brands is expected to see its revenue and profitability grow to $663 million and $132 million respectively, according to analysts polled by Bloomberg who give the company a $31.88 a share price target.
Bain Capital and The Carlyle Group both hold more than 18.44 percent stakes in Dunkin’ Brands, or roughly 22 million shares each, according to SEC filings compiled by Bloomberg. THL Partners holds a slightly smaller 18.15 percent share stake, on just under 22 million shares, putting total private-equity holdings in the national coffee seller at more than 55 percent.
1. Kosmos Energy
A different breed of private-equity investment compared with buyout deals, the Blackstone Group and funding of Kosmos Energy is more of a large-scale oil exploration venture capital investment. In 2003, Blackstone and Warburg Pincus forked over $300 million to a management team looking to drill oil prospects offshore of Ghana. The company borrowed additional funds and it struck oil in the Jubilee oil field in 2007, which gave it a near 24 percent claim on what has been appraised as 120,000 barrels of oil per day.
After striking oil, Kosmos Energy was reported to have received multibillion-dollar takeover bids from the likes of Exxon Mobil, but its private-equity backers decided on a May 2011 IPO. In the share sale, Kosmos Energy sold nearly 38 million shares at $18 each, raising $683 million.
Since its IPO, Kosmos Energy shares are off over 25 percent, underperforming many oil industry peers on disappointing production at its Jubilee oil field. Nevertheless, analysts like Edward Westlake of Credit Suisse note that other wells in Ghana, Cameroon, and Morocco exhibit promise to give the company an “outperform” rating and $25 a share price target. Overall, analysts polled by Bloomberg give Kosmos Energy a price target of $18.94 a share, with 11 “buys,” two “holds,” and one “sell” recommendation.
Nevertheless in a capital-intensive industry, there is the prospect of share dilution. Kosmos’s closest private-equity oil exploration comparable Cobalt International Energy issued new shares to raise capital before reporting strong 2012 drilling results offshore of Angola that precipitated a more than 100 percent stock rise since its December 2010 IPO. More crucial is Kosmos’s significant private-equity shareholding, as the company’s backers close in on a decade-long holding period. In late February, Cobalt sold 15.7 million new shares and its private equity backers sold 31.3 million shares on the heels of a share surge.
Warburg Pincus still holds a near 40 percent stake in Kosmos Energy, or more than 154 million shares, while Blackstone holds a more than 32 percent stake. Overall, the two investors hold nearly 72 percent of Kosmos’s outstanding shares, according to Bloomberg data.
Additional News: Kinder Morgan Strikes Deal with FTC to Sell Pipeline Assets
Additional Views: Is There a Hole in the Dunkin’ Story?: Greenberg
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