IPOs Face ‘Buyer’s Market’

By Clare Baldwin, Reuters

Underwriters are finding that the best way to sell initial public offerings in current market conditions is to slash prices.

The good news is that U.S. initial public offerings are still getting done, even with the broader stock market falling by more than 10% since April.

But the bad news is that underwriters can only sell to jittery investors by cutting offering prices and scaling down issuance sizes, sometimes cutting the value of the deal 40 percent. The two IPOs scheduled to price next week could raise less money than previously hoped.

“Wall Street right now is very, very sensitive to valuation,” said Sal Morreale, a Los Angeles-based IPO analyst for Cantor Fitzgerald. “It’s a buyer’s market.”

The stock market has been extremely volatile recently as Europe wrestles with a potential debt crisis and U.S. employment continues to look weak as the economy tries to get back on track.

The battered market hurt Accretive Health Inc. (NYSE: AH). The company, which helps doctors and hospitals keep track of and bill their patients, sold 10 million shares for $12 each on May 19, raising about $120 million. That was much less than the up to $213.3 million it had planned to raise by selling 13.33 million shares for as much as $16 each.

Accretive wasn’t planning to sell shares for a high valuation, said IPOdesktop.com President Francis Gaskins—the company’s planned price of $14 to $16 a share already put it at a price-to-earnings discount to rivals, he said. However, the relatively low offering price did allow the company’s shares to jump 13% in their first day of trading.

Accretive’s difficulties spell trouble for the planned IPOs next week for Shanghai, China-based Nobao Renewable Energy Holdings Ltd. (NYSE: NRE) and Welsh Property Trust Inc. (NYSE: WLS).

In addition to market worries, Nobao and Welsh could face bigger hurdles as investors compare them with peers.

Nobao sells technology that allows customers to heat and cool their buildings and heat water using energy stored underground.

The company reports the majority of revenue soon after it manufactures and installs the heat pumps but actually collects it over a 10- to 20-year contract period.

“They have very aggressive revenue recognition,” said Nick Einhorn, an analyst with Connecticut-based Renaissance Capital. “On a reported basis [the valuation] looks okay but on a cash flow basis it looks expensive,” he added.

The company reported that it swung to a net loss for equity holders of 1.49 billion yuan ($217.4 million) in the quarter ended March 31, compared with a 280,000 yuan profit a year earlier. In the same period, the company reported that revenue rose more than 300 % to 68.97 million yuan.

Welsh Property Trust, which hopes to raise about $350 million, will own and manage 65 income-producing industrial and office properties in the central U.S. after its IPO. It expects to pay an annual dividend of about 5%, while rivals pay 5.5% to 6 %, Einhorn said.

Nobao hopes to sell 18 million American Depositary Shares for $8 to $10 each. Welsh hopes to sell 17.5 million shares for $19 to $21 each.