NEW YORK (AP) - While the spotlight for the IPO market this week was firmly on General Motors, the show was nearly stolen by a smaller player near the very end, as Harrah's Entertainment canceled its planned offering on Friday.
GM's debut ended on a high note. After a successful initial public offering on Thursday, GM shares rose again Friday, above the initial price of $33, even after spending most of the day down.
But Harrah's IPO told a different story: Debt doesn't sell.
After an anemic two years as the economy drowned in a recession, the market for initial public offerings has awakened from its coma. So far this year, there have been 129 IPOs, more than the last two years combined. Their success rate hasn't been too shabby either. More than half of the shares have traded higher than their issue price. But the ones that disappointed or didn't make it to the market often were weighed down by heavy debt loads.
Last month, First Wind Holdings withdrew its IPO after the independent wind energy company twice lowered its expected price range. The company said it wouldn't get the price it desired in the current market. Investors were gun-shy because of its $600 million in debt, Scott Sweet, senior managing partner of IPO research firm IPO Boutique, said at the time. And its projects didn't suggest they would generate enough cash to cover its debt, Sweet added.
The most successful IPOs this year are from companies that show revenue growth, higher profits (or at least shrinking losses) and manageable debt, Sweet said. That's why a lot of the Chinese company IPOs are performing so well, as most of them have little to no debt.
As of Nov. 5, almost three-quarters of the 26 Chinese IPOs this year traded above their issue price at an average gain of 51.4 percent, according to IPOScoop. Less than two-thirds of the 93 non-Chinese IPOs traded above their issue price at an average gain of 16.2 percent.
Many of those debt-ridden companies are backed by private equity firms. They bought companies with only a slim layer of equity cash up front, piled on debt, paid themselves dividends and attempted to sell them back to the marketplace. That strategy proved successful before the financial crisis two years ago, but investors now are more wary. "It's not the kind of honey that attracts a lot of bees," said John Fitzgibbon, founder of IPOScoop.
Harrah's is a good example. The company carries about $20 billion in debt. Much of it was loaded on by its private equity backers, Apollo Management Group and Texas Pacific Group. They paid $30.7 billion in 2007 to take the company private in what was one of the biggest leveraged buyouts ever. Apollo and TPG had planned to keep majority control of Harrah's after the IPO.
Plus, the company's growth prospects aren't convincing. Its Las Vegas resorts and casinos are still struggling from a weak economy and it has no presence in Macau, the island off the coast of China, where the gambling market is flourishing. Rivals Wynn Resorts Ltd. and Las Vegas Sands Corp. both have a footprint in Macau.
"There is no incentive to buy Harrah's now," Sweet said. "None."
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