(Bloomberg) — Wall Street is talking about a much-needed revival of companies entering markets for the first time after two years of no initial public offerings. But when it came to two of the three biggest debuts so far this year, investors didn't want to hear about them.
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Amer Sports Inc., the maker of Wilson tennis rackets and Salomon ski boots, raised $1.37 billion in its initial public offering, the largest U.S. initial public offering since October, but was priced lower at $13 a share suggested range. The disappointing IPO came less than a week after KKR & Co.-backed BrightSpring Health Services Inc. raised $693 million by selling shares while pricing below a market range – and worse, it plunged 15% on its first day of trading.
The lackluster debuts reflect the distance between what issuers and their bankers were offering and what investors were willing to support. That's not the way IPOs are supposed to work, especially when the U.S.'s major stock benchmarks are hitting record highs. After balking at both companies' leverage and growth prospects, will investors brace for the next batch of new listings?
“There is no doubt that the last deal has some knock-on effects, good or bad, that can impact the next deal and how you set expectations around pricing,” said Gareth McCartney, global co-head of equity at UBS Group AG Markets. “It can be a tactical and sentiment-driven market, so each deal impacts the next.”
The mixed performance of the 2023 vintage could also continue after a turbulent period for IPO buyers. But with $8.3 billion raised in 64 stock sales by existing companies so far this year, it doesn't appear as if activity has come to a complete halt, according to data compiled by Bloomberg.
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Read more: IPO market recovery depends on post-debut trading and retail returns
“Investors have the opportunity to be selective across all variables, but the good news is that they communicate early and often about what works for them,” said Seth Rubin, head of equity markets at Stifel Financial Corp. “We’re moving forward to rebuilding – that recovery will take time and people are looking at everything on a deal-by-deal basis.”
Modest expectations
Ideally, IPO bankers set modest expectations to lure investors to meetings to get a piece of the action. Strong first-day rallies make investors feel like they got a good deal, and although the company and insiders left some money on the table, they can benefit from higher share prices in the years to come.
A key point of contention between these IPO candidates and investors appears to have been the companies' use of leverage. Along with the proceeds from the stock sale, BrightSpring raised an additional $400 million through Tangible Equity units, which were sold concurrently with the stock sale. The move should see the company's $3.4 billion in debt cut from 5.9 times its capital to nearly four times, according to a sellside analyst report seen by Bloomberg.
Read more: BrightSpring Leverage faces scrutiny after IPO collapse: ECM Watch
Amer Sports' net debt of $6.2 billion in the year to September 2023 resulted in a leverage ratio of 10, according to Arun George, while its debt excluding related party loans and leases was $1.9 billion. Dollar and a debt ratio of 3.1, an analyst from Global Equity Research Ltd., writes on the SmartKarma platform.
The marketed IPO price range of $16 to $18 per share, meanwhile, represented an “implied valuation of over $8 billion for a mature but unprofitable company in a competitive industry,” said Jay R. Ritter, a finance professor at the University of Florida.
Demand was so low that three members of a consortium of Amer's existing backers, led by majority owner Anta Sports Products Ltd., bought about 60% of the issue, Bloomberg News previously reported.
“That's a high percentage and a sign of weak demand, particularly because it's an exit,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital.
Read more: Amer Sports focuses on growth after “frustrating” share price
Smaller offers
Despite the brouhaha over the disappointing deals, the 20 IPOs listed so far in 2024 have returned an average of 13.8%, according to data compiled by Bloomberg.
Smaller deals have performed better than their jumbo brethren. Seventeen of the 27 companies that raised between $100 million and $500 million last year are trading above their offering price. A particular bright spot was biotech, with CG Oncology Inc., whose shares nearly doubled, and Alto Neuroscience Inc., which rose 29% in its debut Friday after pricing its expanded offering at the top of a marketed range .
Recent concerns may also ease as there is likely to be a lull in IPO activity in February and potential issuers will rush to have their financial statements audited before filing with the U.S. Securities and Exchange Commission ) submit. Some companies may want to show investors preliminary first-quarter numbers as further evidence of their readiness to go public, at a time when many companies are in cost-cutting mode and layoffs are mentioned in earnings calls at the highest frequency since the pandemic.
The next test of Wall Street's ability to stoke revival enthusiasm could come from more biotech firms or sectors like technology, which are often a leading indicator that IPO enthusiasm is about to explode.
According to Barrett Daniels, co-head of U.S. IPO services at Deloitte LLP, the market for technology deals is still a wait-and-see situation.
“The entries we've seen here recently give us a broader view of how the investment community thinks about IPOs, but it's kind of an apples-to-oranges comparison,” Daniels said.
The small- and mid-cap sector of the U.S. market has significantly underperformed large-cap stocks, but interest in these companies will increase as the Federal Reserve begins to cut interest rates, according to Brad Miller, Global Head of the equity capital markets syndicate at UBS.
“While we are seeing a slight increase in activity, I do not believe we will return to a truly normalized IPO market until the second half of 2024 at the earliest,” Miller said.
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