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IPO Blues

Private equity funds hoping to cash in on the stock market to return money to hungry investors through IPOs (initial stock offerings) may have hit a brick wall. What does this mean for workers?

Private equity funds globally shelled out over USD 2 trillion since 2004 to scoop up companies, but returned two-thirds less to their investors in 2008 compared with the previous year. With debt in short supply and hugely expensive where it can be tapped, sales to other buyout houses - the preferred means of exiting an acquisition during the boom years - are next to impossible for midsize companies on up.

Private equity funds can raise money through issuing shares in their companies in part or in whole, but stock markets have not welcomed recent efforts to raise cash through share offerings, which in the US netted only USD 3.7 billion over the last 6 months, when stock markets were recovering. According to Bloomberg, recent share offerings show the worst performance since 1995.

"In commercial real estate and leveraged buyouts, the bloodletting is yet to come", according to hedge fund investor George Soros.

On October 29, Enron spinoff AEI International had to cancel its proposed USD 800 million public offering when prospective buyers refused to buy the stock even at a radically reduced share price. The offer was cut from a projected USD 800 million to 300 million, ultimately prompting the big investment banks underwriting the issue to withdraw the offer.

Bloomberg quoted analyst Timothy Monfort as saying “Investors are more focused than ever before on buying healthy balance sheets. They don’t want to see a stop-gap measure and they want to know that the equity investment offers a complete solution for the company.”

Healthy balance sheets however are in short supply. The October 25 public offering by Dole, the world's largest fresh fruit and vegetable company, likewise flopped due to the company's high debt level. Dole had hoped to pay down a piece of the enormous debt resulting from its 2003 leveraged buyout by offering shares giving 41% percent ownership at USD 15 per share. The IPO saw this reduced to USD 12.50; on November 5 Dole was trading at USD 11.40.

According to CNN, "Even after the IPO, Dole has debt nearly four times its earnings before interest, tax, depreciation, and amortization. That's more than 50% higher than the leverage levels at rivals like Del Monte and ConAgra Foods. Last year its interest expense ate up a third of its EBITDA. If sales of its branded produce don't rebound, there won't be much left for shareholders to harvest."

Guy Hands of the UK's Terra Firma told the October 14 Super Return Middle East Conference in Dubai “For certain sponsors [i.e. buyout funds], the reality is they’re unlikely to get any carry from these funds, so they want to get out and get on to the next one quickly.” (Carry is the industry term for the 20% share of overall profits captured by the fund bosses - see the IUF Workers' Guide to Private Equity Buyouts).

So where does that leave workers at a time when the funds which own the companies which employ them are anxious to unload but investors are less than enthusiastic about buying companies burdened with intolerable debt levels? Ambitious plans to IPO portfolio companies may have to be shelved in the light of current conditions.

The last things private equity "investors" do is invest in the companies they take over - a point highlighted in the most recent Moody's study of private equity defaults, which according to the New York Times "concludes that private equity firms invest virtually no capital in the companies they buy, especially those in distress."

The funds will be compelled to reduce costs and raise cash in a fierce drive to lower debt ratios. This will entail a mix of trying to force debtors spooked by the risk of losing everything to accept big losses through aggressive debt restructuring , scouring their companies for remaining assets to sell off (as Dole has been doing with large parcels of farmland), and aggressively attacking wages, benefits and pension plans. IPOs will bring no relief to unions representing workers in private equity-owned portfolio companies, who should be on alert and demand comprehensive access to all financial information.