Mega-IPO Deals to Benefit Owners
Mar 17 4:38pm ET
By Per Jebsen
NEW YORK (Reuters) - This week's mega-IPOs have people wondering whether what's good for the parent is good for the offspring.
Travelers Property Casualty Corp., the Citigroup insurance unit, plans to sell 210 million shares at $16 to $19 each, raising $3.68 billion -- and $850 million of convertible debt. Alcon Inc., the eyecare business of Swiss food giant Nestle SA , plans to sell 69.8 million shares at $31 to $35, raising $2.3 billion.
Travelers and Alcon have highly regarded brands, stable, growing businesses -- and sophisticated corporate owners for whom the IPOs are part of a broader strategic plan. That means the IPO investors may not be getting the better part of the deal.
"You're buying from (Citigroup CEO) Sandy Weill, who is selling," said David Klaskin, chairman and chief investment officer of Chicago-based Oak Ridge Investments, which has $950 million of stocks. "Sandy is very, very smart, and if he thought this was extremely cheap, I don't think he'd be spinning it off."
Indeed, Travelers' profits have failed to keep pace with Citigroup's ambitious growth targets.
"As Sandy Weill has put it, the growth rates are too slow, and the return on equity is too low, (for Travelers) to fit in with the rest of Citigroup," said Ira Zuckerman, an insurance analyst with Nutmeg Securities in Fairfield, Connecticut. "By jettisoning this, he can enhance the value of the rest of the company."
Both Travelers and Alcon are "carve-outs," which refers to the partial sale to the public of a company division through an IPO. Last year, U.S.-registered carve-outs accounted for 50 percent of U.S.-registered IPO dollar volume, according to John Brand, an IPO analyst with research firm Dealogic.
So far this year, the proportion has been 20 percent, but would rise to about 71 percent once Travelers and Alcon come to market, he said. In each case, proceeds from the IPOs, which are the biggest so far this year, will fill the coffers not of the parent but the newly public company instead.
"(The Travelers IPO) is merely a financial transaction rather than a cultural metamorphosis," said David Menlow, president of IPOfinancial.com, an IPO research firm. "Let's not forget that Travelers was public already."
Hartford, Connecticut-based Travelers, the leading U.S. property/casualty insurer, was taken private in April 2000, four years after it had gone public. Following the IPO, Citigroup intends to distribute most of its remaining Travelers shares to Citigroup shareholders.
Nestle wants to spin off Alcon, the world's largest eyecare company, to fund more acquisitions, according to Alfredo Rotemberg, a portfolio manager with the $620 million Armada International Equity Fund.
"Nestle needs to buy companies all the time," he said. "This is the fight: who buys the most and best companies, because it's all about shelf space in the supermarket."
Spinning off Alcon not only will add to Nestle's resources in competing against rivals but also in wresting back some control from increasingly powerful supermarkets, Rotemberg said.
ENOUGH INTEREST
Though the parents may benefit, each IPO certainly will attract sufficient buyers, analysts said.
"Travelers is one of the largest property/casualty companies, and it's one of the few big ones with a mix of both personal and commercial lines," Nutmeg's Zuckerman said. "It's been -- up until now -- reasonably well managed."
Having both personal and commercial insurance products allows the insurer to better balance its earnings' streams, he said.
Investors will like Traveler's good record of estimating "reserve liability," a key measure for property/casualty companies; as well as improved commercial-line prices since Sept. 11 and the better performance of property/casualty shares compared with the broader market, Zuckerman said.
Investors may worry over recent defections by top managers, including Travelers' former Chief Executive Jay Fishman, who joined property/casualty insurer St. Paul Cos. in October as its chief executive, Zuckerman said. Bob Lipp, who took the CEO position in December, served as Travelers' chief executive from 1993 to 2000.
Alcon, based in Hunenberg, Switzerland, is attractive because of the Nestle name and Alcon's leading market share for ophthalmic products, IPOfinancial's Menlow said.
In fact, a strike against Alcon is that it's not called Nestle, according to Oak Ridge's Klaskin.
"There needs to be a little more presentation as to who they are and what they are," he said.
"The first thing (investors) think is that it's an aluminum company ... it looks like it could be Aluminum Consolidated," similar to Alcan Inc., the world's second-largest aluminum producer, or Alcoa Inc., the leading U.S. aluminum maker, Klaskin said.
Both Travelers and Alcon are expected following their IPOs to trade on the New York Stock Exchange, with the proposed symbols "TAPa" and "ACL" , respectively. Salomon Smith Barney is lead underwriter for Travelers; Credit Suisse First Boston and Merrill Lynch & Co. are lead underwriters for Alcon. |
