U.S. Q3 Pipeline Slows Yet Recent Activity and Positive Post IPO Returns Indicate Healthy Signs for Fall

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New York, 24 September 2012 – According to EY’s U.S. IPO Pipeline Analysis, despite a slower quarter from Q2, the IPO market in Q3 2012 was stronger than it was in Q3 2011 with 21 and 16 effective IPOs respectively excluding REITs, closed-end funds, SPAC and OTC issues. Three IPOs are scheduled to price before the end of this quarter, including the $4 billion offering from Santander Mexico Financial Group. Year to date figures also show a better IPO market compared to last year. IPO volume and value for the nine months in 2012 were 90 and $31 billion, up slightly from 85 and $28 billion for the nine months in 2011.

“Looks like we’re headed back to work bolstered by measures from the European Central Bank and our own Federal Reserve to restore confidence in the markets,” said Herb Engert, Strategic Growth Markets Practice Leader for Ernst & Young LLP, @HerbEngert. “We are seeing signs of life with a flurry of activity at quarter’s end including offerings from Capital Bank Financial, National Bank Holdings, Susser Petroleum Partners LP and Trulia.”

Total U.S. IPOs in the pipeline as of September 21, 2012 declined to 114 in Q3 from 129 in Q2, and 181 in Q3, 2011. However, the ability to file confidentially as a result of the JOBS Act continues to impact the pipeline and confidential filings are on the rise. As of September 21, 2012, 21 or 36% of the 58 new registrants after April 2012 were confidential filers.

“While the volume of IPOs that came to market were down, as is generally the case during the slower summer months, in the third quarter post-IPO returns were up 30%, compared to 7% for the S&P 500.” said Jackie Kelley, EY’s Americas IPO leader. “In fact, companies with IPO offerings between $100 and $300 million had the highest post IPO returns. This shows us that investors are really favoring small and mid-sized offerings.”

Year-over-year pipeline comparison table:

 

Time period

 

# of companies in the Pipeline

Total dollar amount in the Pipeline ($bn)

 

Average deal size in the Pipeline ($mm)

# of U.S. IPOs that went public in the quarter

Proceeds from IPOs that went public in the quarter ($bn)

End of Q3 2010

133

$26.4

$198.3

33

$5.6

End of Q3 2011

181

$32.5

$179.5

16

$3.5

End of Q2 2012

129

$23.1

$175.1

30

$22.6

Q3 2012 as of September 21, 2012

114

$26.2

$229.5

21

$3.0

 

The Q3 Review:
In Q3, out of the 21 IPOs, nine priced within or above their price range, while 12 priced below their expected range. With Santander Mexico Financial Group’s registration in August, average IPO size in the pipeline increased to $230 million in Q3 from $175 million in Q2. At the end of Q3, 114 registrants are seeking $26.2 billion. During the third quarter, 21 effective IPOs were issued, a decrease of 9 from Q2. Of the 21 IPOs priced, 18 had positive returns, and the overall average post IPO return was 30%, compared to 7% for the S&P 500. The number of withdrawn IPOs fell considerably, to 12 in Q3 from 18 in Q2 however market sentiment and investor confidence is gradually improving.

Notable Q3 companies that priced include:

  • Manchester United Ltd., priced at $14 and raised $233 million
  • Hi-Crush Partners LP, priced at $17 and raised $220 million
  • Bloomin’ Brands Inc. priced at $11 and raised $202 million
  • Globus Medical Inc., priced at $12 and raised $115 million

(note: total proceeds include overallotment)

A sector breakdown of the 114 IPOs currently in the pipeline show that:

  • 22 are in Oil & Gas, raising $6.7 billion
  • 22 are in Technology, raising $3.8 billion;
  • and
  • 17 are in Life Sciences raising $1.2 billion.

Professional Firms & Services and Diversified Industrial Products round out the top five sectors in the pipeline raising $894 million and $1,560 million respectively. Together, the top three sectors for new IPO registrations—Technology, Oil & Gas, and Life Sciences—account for 61 of the 114 registrations.

Regionally, California continues to lead deal volume with 20 companies seeking $2.1 billion; followed by Texas with 17 companies seeking $5.7 billion; and New York with 8 companies seeking $1.2 billion. Illinois (seven companies, seeking $1.4 billion) and Colorado (four companies, raising $769 million) round out the top five. Among international filings, China has five companies seeking $340 million.

Sector Highlight: Retail & Restaurants

Despite a sluggish economy, overall there was an uptick in restaurant and retail IPOs with total effective companies in 2012 surpassing 2011. The nine companies—four restaurants and five retailers – that came public in this sector raised close to $1.5 billion in proceeds, with more than half pricing shares in the third quarter. The five IPOs issued in 3Q—three restaurants and two retailers—raised $676 million in proceeds.

The Restaurant and Retail sector represented 23% of the total funds raised for 3Q and made up 24% of the IPOs. However, looking forward, both retail and restaurant companies are heading into a holding pattern due to continuing concerns around the global economy and for restaurants, the rising price of commodities.

In 2011, popular retail brand Michael Kors opened a lot of eyes in terms of valuation and in July teen retailer Five Below boosted its IPO price. “Valuation is obviously very important on the front end but what really differentiates a retail company is whether or not it can scale once it’s public,” said Dan Valerio, Americas Director, Retail & Wholesale Sector, EY. “Investors are looking for strong brands that will continue to grow. In today’s market, a company cannot be an average performer anymore; the brand has to stand for something.”

Retail is still feeling some of the economic malaise and brands are taking a patient and cautious approach, focusing on strong basics and fundamentals and doing things well. They are taking care not to over invest or grow stores rapidly. The name of the game is slow and steady versus high growth.

July and August saw a big influx in restaurant IPOs – with a few companies going public again after being taken private such as Chuy’s Holdings Inc. and Del Frisco’s Restaurant Group LLC. However, September has caused a bit of a pause for restaurant IPOs due to uncertainties in the marketplace including a weakened global economy, and months of extreme heat and dry weather which damaged large portions of corn crops—primarily grown for feed use—which has sent beef prices significantly higher. Bloomin’ Brands Inc. priced this quarter trimming the value of its offering by 40% yet its post IPO performance has been up.

“Restaurant IPOs have continued to pick up steam over the past three quarters, but with some macro-issues impacting the sector that have not eased like Eurozone uncertainties and high commodity prices I’m not surprised that the sector is taking a pause to see what the future holds,” said Michael Gottlieb, Global Leader, Restaurant Services, Ernst & Young LLP.

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