First New Offerings Of 2010 Try To Thaw Out Investors' Wallets

By Amy Reeves, Investor’s Business Daily, Jan 15, 2010

Five IPOs have lined up at the starting gate to start the 2010 season. But investors don't seem to be storming the betting windows.

Analysts generally agree that the strongest candidate is Symetra Financial, a health and life insurer owned partly by Warren Buffett. The firm is large and profitable with revenue of $1.3 billion and net income of $96 million in the first nine months of last year.

But the company has had a rough road to the market. It first filed in 2007, but withdrew, then refiled in October with a lower price range. But it shrank the size of its offering slightly last week as Buffett and his partners decided not to sell their own shares.

Buffett's decision sends mixed signals, says Morningstar analyst Bill Buhr.

"If I had to speculate, I'd say that's half a vote of confidence for the company and maybe half because of the general vibe in the IPO market," he said. "It may not be the best time to unload a significant stake."

Sector Weakness

Buhr's colleague Alan Rambaldini issued a note describing the offering as "low interest" both because of the insider control and the weakness of the sector. "(A)t 4.2% of investments, the firm's thin capital cushion is still a cause for concern," Rambaldini added.

But Francis Gaskins, president of IPO Desktop, is more bullish on the company. He says Symetra is just bowing to investor caution, which is usually high at the beginning of the year.

"IPO investors are always a little slow to get back in the game," he said. "The fact that five IPOs are scheduled for (this) week — that's high for January."

Symetra will probably do secondary offerings down the road as the market warms up, says Gaskins. The planned offering, which would raise about $350 million with 27 million shares, represents a small portion of Symetra's estimated $1.5 billion market cap.

The other offerings on deck show a continuation, even an exaggeration, of last year's trends. China, which provided a record-high 17% of U.S. IPOs in 2009, is the home of two planned offerings: China Hydroelectric and Andatee China Marine Fuel. China's dam buildout is fueling the IPO of China Hydroelectric this week, but it expects to raise only $50 million.

But both offerings are tiny, raising less than $50 million, and are underwritten by obscure banks.

Some Chinese mini-microcaps, such as Tri-tech Holdings (TRIT) and Lihua International (LIWA), turned in big returns last year. But the Middle Kingdom also dropped enough high-profile bombs to make investors extra cautious.

"I'm not even covering the two Chinese deals," said Scott Sweet, managing partner of IPO Boutique. "Number one, they're too small, and number two, the underwriters are underwriters of last resort."

Another planned offering, Cellu-Tissue Holdings, shows the continued influence of private equity on the IPO market. Owner Weston Presidio has been putting together paper-production facilities to create a major producer of tissues, paper towels, napkins and so on for the private-label market.

The sector is a strong one as paper products currently ranks No. 3 among IBD's 197 industry groups. But the recent mergers make year-over-year financial comparisons difficult and have left the firm $270 million in debt. The expected $125 million the IPO will raise will only cover part of that. Sweet also laments that there are "zero barriers to entry" in a market with rivals like Kimberly-Clark (KMB) and Orchids Paper Products (TIS).

Finally, a newly formed real-estate investment trust (REIT) called Terreno Realty will have a go at raising $300 million. But it will have a tough row to hoe since the REIT craze started fading late last year, resulting in several withdrawals.

Pick-Up Seen

What does all this say about the 2010 IPO market? Most analysts expect a pick-up in IPO activity, continuing the uptrend from the second half of last year. But the offerings on board for this week leave some wondering where the quality IPOs are.

"I'm surprised that some of the better IPOs in the pipeline have not been assigned dates, especially tech," said Sweet. "Tech is strong. I don't know what is the delay."

But Gaskins argues not to expect too much too soon. Last January saw no IPOs at all, while January 2008 didn't really get going until its last week.

Still, the performance of the first few debuts could set the tone for the year.

"The next two weeks are going to be interesting," said Buhr. "I would say I'm not completely pessimistic, but if these price below the range, or fail to price altogether, then we're off to a scary start. Maybe the IPO window is closing slightly."