Goldman, Citi and UBS are all underwriting the IPO of PetroAlgae, a small renewable energy company with an IPO set to happen at some unknown point in the future (they have not announced a timetable).
The IPO is getting a lot of attention right now because PetroAlgae is a small company that’s losing money, will require a complicated IPO and because Goldman is underwriting it.
Reuters’ Steve Eder argues Goldman would have in the past turned their nose up at the chance to underwrite the IPO of a company so small.
So the fact that Goldman jumped on PetroAlgae is strange and reminds eder of back in the 1990s when everyone pounced on any company that had a dot-com web address.
It’s an interesting thesis, but the argument is based on the assumption that Goldman only works on snobby-sounding M&A deals.
Here’s why Goldman’s managing PetroAlgae’s IPO is weird, according to Reuters:
- IPOs like this are usually too downstream for a top-tier firm like Goldman. The company plans to raise only up to $200 million in the offering.
- PetroAlgae has no revenue. Director and chairman John Scott said the company would see initial revenues by the end of 2009. He said a consortium of Chinese interests would pay for the company’s first licence agreement. Those revenues never arrived. The company has lost $58 million over the past three years.
- PetroAlgae is not a leader in its field. Unlike one of its rivals, it doesn’t have dollars flowing its way from Exxon Mobil Corp (XOM.N), which is expecting to pump $600 million into the emerging industry.
- It’s a small but complicated IPO. PetroAlgae is already traded, and it will be brought into broader public circulation through a complex reverse merger, which will amount to an IPO.
There are a few reasons (including one that’s really no reason at all) that it’s bizarre, but also a number of reasons why underwriting the IPO is a great idea.
Here’s why Goldman’s managing PetroAlgae’s IPO is smart, according to Reuters:
- Since the financial crisis, Wall Street banks have gone further down market as they look to collect fees and stay competitive in the league tables. IPOs that Goldman has helped underwrite this year have raised an average of $225 million, compared with $685 million a decade ago. (Related: Is Goldman Sliding Into M&A Oblivion?)
- The members of PetroAlgae’s leadership team created a new technology that opened strongly on the market in 2007. TyraTech, a company that makes environmentally friendly insecticides and which went public in 2007. The shares began trading at 505 pence on the Alternative Investment Market of the London Stock Exchange, but they now trade at just 22.50 pence.
- Should the PetroAlgae IPO succeed, Goldman could be well positioned to take part in others. Gevo Inc, an Englewood, Colorado-based bio-fuel developer, said it would go public in a $150 million offering on August 12th. Goldman is among the underwriters of the Gevo IPO.
- PetroAlgae has a strategic partnership with a large oil company. Last November announced it had signed a memorandum of understanding to enter an agreement to licence its proprietary technology to Indian Oil Corp, India’s largest company by sales.
Now check out Is Goldman Sliding Into M&A Oblivion? >>>
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