Offerings In The Offing / The Money Trail
It points to a difference Between two IPOs
06/30/1997 Barron's Page 54 (Copyright (c) 1997, Dow Jones & Company, Inc.) reprinted with permission
"Follow the money!" Hollywood's slightly wigged-out version of Watergate's Deep Throat advised Robert Redford in All the President's Men. That's also a good first step when sizing up an initial public offering. There's no scandal, political or otherwise, in Pierce Leahy's planned IPO, but its use of net proceeds raised -- solely to repay debt -- is likely to cool investors' interest in the deal. However, Qwest Communications International's use of the money raised in its offering -- primarily to expand -- reaffirmed investors' Norman Rockwell belief in the equities market, and the deal opened with a 5 1/2-point premium.
Pierce Leahy, an archive-records management company with 161 sites in the U.S. and Canada, this week plans to offer about 5.3 million shares at $15-$18 each, through underwriters led by Smith Barney. The deal includes 212,614 shares being sold by shareholders, putting money in their pockets -- not the company's. Net proceeds from the bulk of the shares will be used primarily to redeem a portion of the company's notes due 2006.
Debt doesn't necessarily spike a deal, especially in a startup with
whiz-bang technology that's going to change the world. But Pierce Leahy's operations date to 1957 when its predecessor company, L.W. Pierce, was established to provide filing systems to companies in the Philadelphia area. The company has expanded recently, but storing boxes isn't exactly cutting-edge technology.
Pierce Leahy's deal includes a concurrent $100 million debt offering due 2007. Nothing eye-popping about that, but the company will use a portion of the net proceeds from its IPO to pay off notes maturing in 2006 and to take on additional debt due 2007. The net proceeds from the new notes will be used to repay outstanding borrowings under the company's credit facility.
Few would argue with the merits of debt consolidation, especially at a lower rate. (The new rates aren't stated in the preliminary prospectus.) But Pierce Leahy's juggling of funds looks a bit like an undergraduate's using the overdraft protection on his checking account to pay off his credit card and then asking the bank for a loan. With more attractive deals in more dynamic sectors coming to market, why bother with this one?
Qwest Communications, on the other hand, is very attractive and worth a look in the aftermarket -- at the right price. The 13.5 million shares being sold, all offered by the company, were priced at $22, via Salomon Brothers. The price talk had been $17-$20. The stock opened Tuesday at 27 1/2 and early Friday was fetching 27 7/16.
The company will use most of the money raised in the IPO to build a 13,000-mile coast-to-coast fiber-optic network that will be available to major telecommunications companies and other users. The network,
scheduled to be completed next year, will connect 92 cities that generate
about 65% of the originating and terminating long-distance calls in the
U.S. The high-capacity lines are laid next to existing railroad tracks,
eliminating the need to acquire expensive rights-of-way and making a nice
mix of 19th and 21st century technologies.
Qwest Communications was founded in 1988 as Southern Pacific Telecommunications, a subsidiary of Southern Pacific Transportation, and it began building fiber-optic systems along SP's rights-of-way for major long-distance carriers.
If an IPO is a bet on the pedigree of a company's top management, Qwest wins a blue ribbon. President and CEO Joseph P. Nacchio, 47, joined AT&T in 1970 and last served as vice president for the telecommunication giant's consumer and small-business division. Chairman Philip F. Anschutz, 57, served as vice chairman of Union Pacific since it merged with Southern Pacific in 1996.
Qwest reported a loss of nearly $7 million on revenues of $57.6 million for the year ended Dec. 31, 1996, but only two sections of the network are operating -- between Los Angeles and Sacramento, and Dallas and Houston. Investors bidding up the stock apparently believe earnings will improve when the system is completed late next year and massive capital spending ends. Most of the money raised in the deal goes to building the system and only a small portion, about $28 million, will be used to repay debt.
"Qwest is a position play," says Steven Samblis, in Orlando, Fla. "This isn't a trading stock. I'd treat it the way retired IBM employees treat Big Blue's stock: Hold it, and ignore minor fluctuations."
But Manish Shah, publisher of IPO Maven, a review of coming deals, warns that new telecommunications stocks can be volatile. He says Qwest is addressing a real problem of capacity, but it's unclear if the company can meet investors' expectations for earnings. The company is seeking to build market share, but if it doesn't make money soon, the stock will be whacked. "I'm not willing to pay $29 a share," he says. "I think the stock will be cheaper in six months or so, and it deserves a look at $12 or $13." |
