NEW YORK (
) -- The epic rise of
shares -- and their subsequent fall after a February initial public offering -- is an early read on an investment boom that will connect private equity financiers with ordinary stock investors.
Private equity firms are expected to look at share sales like Caesars Entertainment as a way to begin exiting buyouts in coming years. Those soon to be public investments, and a string of recent multi-billion dollar IPO's, give investors a new set of stocks to pick over. But buyer beware those companies may increasingly be weighed down by their former owners.
Recently IPO'ed stocks like Caesars Entertainment have a private equity share overhang
When private equity firms
Apollo Global Management
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% 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% of the company's shares even after its IPO, according to
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%.
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, it's an illustration of a trend to watch as once-private companies become increasingly available to stock investors.
Here's a look at
that could face pressure if private equity shareholders were to look for a speedy exit. In 2011, private equity backed IPO's reached a post-crisis high of $38.6 billion, according to
data, as firms used recovering stock markets to realize investments. In recent reports,
Alvarez & Marsal
Bain & Co.
expect private equity funds to further consider share sales as a way to return capital to investors in 5-10 year old funds.
For more on private equity investments, see
One of the largest buyouts at the time, HCA was taken private by Bain Capital and
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
, who 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% 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
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% of the company's float, according to
Securities and Exchange Commission
filings. KKR holds a 87.5 million-plus share stake representing 20% 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.
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
Since its February initial public offering, Kinder Morgan has been the most aggressive player in the pipeline space, cutting a $21.1 billion deal for competitor
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 over $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% 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% below Tuesday trading prices, on the company's growth prospects and a big overhang of private equity shareholdings. "We see the $12bn 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
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% stake in Kinder Morgan after its IPO, or 238 million shares. Kinder and a consortium of private equity investors that includes
The Carlyle Group
, among others, owns over 80% of the company's outstanding shares according to
After being seized by the
Federal Deposit Insurance Corporation
in May 2009 on concerns over the Florida-based lender's solvency, BankUnited 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%, underperforming the
KBW Bank Index's
near 7% 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
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% to 14 cents a share.
"Given their pessimistic view of M&A 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
who give shares five "buy" ratings and four "holds."
The bank's five largest shareholders are private equity funds that hold an over 50% stake in the Miami Lakes, Fla- based lender. Wilbur Ross-run
WL Ross & Co.
and the Carlyle Group each hold 13.87% stakes in BankUnited shares, according to
data. For more on BankUnited shares, see
Bain Capital, the Carlyle Group and THL Partners bought Dunkin' Brands, 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 initial public offering at $19 a share, giving the company a market value of $2.4 billion, however, shares spiked 47% 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% 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
who give the company a $31.88 a share price target.
Bain Capital and the Carlyle Group both hold over 18.44% stakes in Dunkin' Brands, or roughly 22 million shares each, according to SEC filings compiled by
. THL Partners holds a slightly smaller 18.15% share stake on just under 22 million shares, putting total private equity holdings in the national coffee seller at over 55%.
A different breed of private equity investment compared with buyout deals, the Blackstone Group and Warburg Pincus's 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% claim on what it's appraised as 120,000 barrels of oil per day.
After striking oil, Kosmos Energy was reported to have received multi-billion dollar takeover bids from the likes of
, 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%, 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 a "outperform" rating and $25 a share price target. Overall, analysts polled by
give Kosmos Energy a price target of $18.94 a share, with 11 "buys," 2 "holds and a "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 an over 100% 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 International Energy 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% stake in Kosmos Energy, or over 154 million shares, while Blackstone holds an over 32% stake. Overall, the two investors hold nearly 72% of Kosmos's outstanding shares, according to
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Written by Antoine Gara in New York