By Matt Jarzemsky
Even as worries over the course of Federal Reserve policy leave
investors jittery about the outlook, industrial and hardware supply
company HD Supply Holdings Inc. is set to wrap up one of the year's
biggest U.S. initial public offerings.
Until a few weeks ago, the IPO market had seemed on track for a
long-awaited revival from its post-financial crisis doldrums.
Notably, investors were willing to take a chance on new shares from
companies carrying high debt loads and limited prospects for
growth.
But the flare-up volatility in recent weeks has led to a
scuttling of some deals and raised questions about the appetite for
heavily indebted companies. And HD Supply, which is looking to sell
roughly $1.25 billion worth of stock, not only carries lots of
debt, but its focus on industrial equipment leaves it in the
cross-hairs of concerns about the strength of the U.S. economy.
"Typically, the IPO and secondary offering market closes down
when people feel like 'I'm going to lose money buying stocks,'"
said Jim O'Donnell, chief investment officer at Forward Management,
which manages $6.5 billion in San Francisco. "The window is really
starting to close here, based on the Fed's commentary. I would not
be surprised, if we see another sharp selloff, to see a bunch of
deals get pulled."
Mr. O'Donnell is taking a more conservative stance on buying
shares in IPOs, trying to "keep our powder dry" for particularly
attractive deals, he said.
HD Supply expects to see 53.2 million shares price in a range of
$22 to $25 each late Wednesday, as the Atlanta-based company seeks
proceeds to pay down debt. At the midpoint of that range, the deal
would raise $1.25 billion, marking the third-largest U.S. IPO this
year and the biggest since investors became fixated on the Federal
Reserve scaling back stimulus.
Concerns about the Fed's eventual wind-down have spooked
investors, leading to a sharp rise in interest rates and a bumpy
ride lower for U.S. stocks in June. The renewed volatility
threatens to interrupt the stock-sale nirvana that companies,
private-equity firms and investment bankers have enjoyed for most
of 2013.
Sluggish market conditions already have scuttled several recent
stock offerings. Brazilian building materials maker Votorantim
Cimentos SA last week postponed an IPO because of "unfavorable"
market conditions. Earlier this month, and single-family rental
home owner Colony American Homes Inc. postponed its IPO.
Those deals' setbacks punctuate recent investor skepticism about
certain segments of the market. Colony had planned to debut as a
real-estate investment trust, but REITs sold off sharply as the
company neared the completion of its IPO. Votorantim Cimentos
stumbled amid a tumble in emerging-markets shares.
Bulls say companies with big growth prospects or a
well-established industry position still will find willing
buyers.
HD Supply and its bankers argue rising sales will help the
company return to profitability by 2014, according to people
familiar with the marketing of the deal.
The company distributes fire hydrants, PVC pipes, light fixtures
and other products to contractors, hotel operators and others. Its
facilities maintenance unit, which accounts for the largest share
of sales, tends to be steady in good times and bad. Business lines
focused on building materials and water transmission prospects are
more cyclical.
"Given the environment out there, it's not a lock that these
things have the kind of growth rates or margin expansion that's
anticipated out there," said Tony Boase, senior research analyst at
Nuveen Asset Management. Mr. Boase declined to comment on whether
he would recommend portfolio managers at the firm participate in
the IPO.
The company's heavy debt levels also might give investors pause.
As of Feb. 3, HD Supply had $6.43 billion in total debt, or 9.4
times its adjusted earnings before income tax, depreciation and
amortization for the latest fiscal year.
Private-equity firms Bain Capital, Carlyle Group and Clayton,
Dubilier & Rice each own 27.9% of HD Supply. Home Depot Inc.
(HD), which sold most of the company to those firms for $10.3
billion in June 2007, the height of a buyout boom, continues to own
12.4%.
HD Supply is expected to start trading on the Nasdaq Stock
Market Thursday under the symbol "HDS." Bank of America Corp. is
leading the deal with Barclays PLC, J.P. Morgan Chase & Co. and
Credit Suisse Group AG.
Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com
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