The Return of the Why-P.O.


Red Herrings to be wary of

Why?  Because the capital markets will support it, that’s why.

We’re starting to see something I had hoped would be further down the pike during this economic recovery cycle:  The Return of the Why-P.O.

What in tarnation is a Why-P.O. you ask?  It’s an IPO so pointless for investors to be involved with that you can only scratch your head after reading the prospectus and ask “Why?”.

Contrary to popular belief, the “window” never really closed for equity capital markets, even after the demise of Lehman.  Banks were getting preferred stock offerings done left and right last fall (although preferreds are more of a hybrid debt/equity instrument).  There was also plenty of appetite for secondary offerings pretty much straight through, even for casinos and hotel REITs.

What you couldn’t get done for much of the last 12 months was an Initial Public Offering or IPO.  It appears, however, that the IPO window is not only now open, it has been shattered.  There’s enough room to get almost any company public now, regardless of corporate structure, and this is not a positive development in my eyes.

I was not and am not a fan of the recent A123 (AONE) advanced battery IPO from Goldman Sachs, but I respect the company and it’s investors for attempting to raise capital to exploit the technology.  It was good to see something cutting edge be able to get going, even if I don’t want the risk myself.  That’s a legit IPO with a raison d’etre and the possibility of big returns to go along with the big risk.

What I hate seeing are deals like Dole Food Company or Hyatt, both of which are imminent and in my opinion, quintessential Why-P.O.s, regardless of where they open upon their debuts.  These are not bad companies per se, they just seem to be needless investments, regardless of the fundamentals.

Here’s why:

The Dole Food Company

The Dole Food Company is a 150-year-old company controlled by the 86-year-old billionaire who took it private in 2003.  Now he’s selling 41% of it back to public shareholders for the purpose of paying off both the company’s debt…and some of his own!  Now why on earth would I want to have either my own money or a client’s money be a part of that?

David Murdock, the billionaire, will still maintain complete control as majority shareholder.  Great, high debt and no governance?  Where can I sign up?

Proceeds to pay down debt is one of my top dislikes whenever I read a red herring.

Hyatt Hotels

Hyatt Hotels’ IPO may be even worse, and I’ll steer clear of this one as well.  Here’s the scoop:  The controlling family of Hyatt, the Pritzkers, are unloading a quarter of their shares to raise $1 billion.  The whole structure of this thing sucks like a Dyson vacuum.

For starters, the Pritzkers are notorious for in-fighting and bickering, yet they will still have a majority and be calling the shots.

Secondly, they’re setting this up as a dual share class company, like the New York Times, where the family retains one class of shares that have 10 times the voting power of the share class you the investor will own (disengenuously, they’re calling the public offering stock the “Class A Stock”).

Oh, and here’s the best part – the Pritzkers have the right to liquidate 25% of their personal holdings in the open market each year…Viva Dilution!  They’re selling this deal by telling investors it’s coming out at a big discount to Marriott (MAR), but with these negatives, what choice did they have?

Proceeds to pay off selling shareholders is another of my top dislikes in a red herring.

I’m not going to speculate on how these stocks will trade once public, I don’t make buy or sell calls here on TRB.  What I will say is that when junk, albeit well-pedigreed junk like this gets a bid, it tells you that there may be more froth in the markets than you may have thought.

These deals remind me of when the LBO shops dumped Burger King (BKC) or Avis Rental (CAR) back on the stock market after stripping all the cash out of the businesses while they were private.  Guess when they got away with those IPOs?

Sold to you if you foolishly get excited by the brand names without doing the research.  These two deals are Why-P.O.s in every sense of the term.  Yes I made that term up, btw, but you can use it.


Dole Sells a Stake  (LA Times)

Hyatt IPO Not Such a Bargain  (DealBook)

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