There’s a pair of monster IPOs hitting the market this month — payments processor First Data, and supermarket chain Albertsons.
They have got a lot in common. Both are private-equity backed. Both are looking to raise much more than the average US IPO — which raised just under $US200 million this year.
Both are only raising funds to pay down the massive amounts of debt that they have had thrust upon them by their private-equity backers. Neither company is profitable. They’re also not growing particularly fast.
First: First Data. Backed by KKR, the company launched an IPO this week with the aim of securing as much as $US3.7 billion, and putting almost of all of the proceeds to work paying down borrowings. But with more than $US20 billion in debt, the IPO will hardly even put a dent in the payments processor’s tab.
First Data is primarily a payments processing company, which isn’t exactly a high growth business. Revenues rose 3% last year, and are just 7% higher than they were at the end of 2010. And the company is unprofitable, so its new shareholders shouldn’t expect a dividend any time soon.
Albertsons, the grocery chain that recently merged with supermarket giant Safeway, has a similar financial profile. It’s also using most of the nearly $US2 billion it takes in to pay down debt – also a small piece of its overall borrowings of more than $US12 billion.Like First Data, Albertsons isn’t a high growth business. Revenue in a 16-week period through June 20, 2015 of $US17.6 billion — which is adjusted for the Safeway acquisition — was less than $US400 million higher than the year before. And like First Data, it’s unprofitable.
Albertsons is backed by private-equity firm Cerberus.
Does this mean nobody’s going to buy? No, says Matthew Kennedy, a data analyst at Renaissance Capital.
“All of the companies, despite negative characteristics, are sector leaders,” he said.
With scale and market dominance comes stability, and after investors have been burned on high-growth deals — like those in the biotech space — this is appealing. Albertson’s is the No. 2 supermarket in the US behind Kroger, and First Data — with operations in 118 countries — claims to rank No. 1 in several key business lines.
And, at least investors can know that the private-equity firms that control the two company’s — KKR and Cerberus — are in it with them. Neither fund is selling shares in the IPO.
We’ll know soon enough if investors are willing to bet on either company. Both deals should close on October 14, according to data from Bloomberg.
It’s not just investors who will be watching closely. Other private equity funds that have assets to sell also surely have their eye on these two deals. Both Univision, the Spanish-language programmer, and Neiman Marcus are expected to wind up in the IPO market later this year.