Graham IPO may buck negative Blackstone trend, exits in 2010; market remains rocky

Graham Packaging Co Inc's recent initial public offering was a rare bright spot amid private equity firm Blackstone Group LP's recent struggles in the public equities market. The IPO, which made its debut on the New York Stock Exchange on Thursday, paved the way for a Blackstone exit, even though the firm did not get the price it wanted or sell the shares it planned.
"It allowed Blackstone to create a public market for one of its portfolio companies. However thin the liquidity might initially be, at least it's public," said South Beach Capital Markets Advisory Corp President Bruce Foerster, who formerly worked as the head of equity capital markets at PaineWebber and the head of the global equity syndicate at Lehman Brothers.
"They're getting a mark to market on a daily basis either up or down. They've laid the foundation for a liquidity event down the road." Blackstone has been less successful with other recent attempts at bringing portfolio companies public. On Wednesday, Blackstone-backed airline ticketing firm Travelport LLC called off its $1.78 billion London listing, postponing what would have been the biggest IPO in London in two years. On Thursday, Merlin Entertainment's, the Blackstone-owned theme park operator that was talking to bankers in October said it has no near-term plans to go public.
Despite hopes of a strong second half of the year, the IPO market has struggled lately. Since October, 60 IPOs have been cancelled or postponed - 29 in the United States, 7 in Europe and 19 in Asia. Deals worth $16 billion have been shelved compared with the $83.1 billion raised by the 352 deals that went forward, according to Thomson Reuters data.
Nineteen private equity-backed IPOs moved forward globally, raising $7.5 billion. In the United States, 29 IPOs worth $7.2 billion were shelved compared with the 33 IPOs worth $10.7 billion that went forward. Thirteen private equity IPOs have raised $5.2 billion.
Private equity firms buy companies mostly with the use of borrowed money. IPOs are one way they recoup investments and turn a profit. Blackstone said in a letter to investors in October that it would take up to eight of its portfolio companies public in the next 12 to 18 months.
Blackstone spokeswoman Christine Anderson indicated the private equity firm remains positive. "The markets remain volatile," she said. "Blackstone is a long-term investor. We predict that there will be opportunities for exits this year. Investors trust us to wait until the time is right to realise optimal value." Graham Packaging made major concessions to get its IPO off the ground, but it traded 2 percent above its IPO price on its debut and is now up 4.5 percent. Graham delayed the offering and slashed its value by more than half. Blackstone, which owned 75.1 percent of the company and planned to sell about 11.5 percent of its stake, did not sell any shares.
Blackstone invested a little over $1 billion in the company in 1998. It typically invests in portfolio companies for about six years. It has been in Graham for 12 and tried to sell the company four times prior to the IPO. In the downsized IPO, Graham Packaging raised about $167 million, or about 28 percent of its post-IPO market capitalisation.
Its enterprise value to earnings ratio was about 39, higher than competitors Ball Corp and Silgan Holdings Inc, which are about 22 and 33, respectively, according to IPOdesktop.com President Francis Gaskins. Enterprise value is a metric that includes debt. Graham Packaging had about $2.4 billion worth of debt as of September 30.
Ultimately, the cheaper valuation and more conservative exit approach could work to Blackstone's advantage. Another Blackstone company, hospital staffing company Team Health Holdings LLC, cut the value of its IPO in December by roughly 46.8 percent and also said Blackstone would keep all of its shares rather than selling some as planned.
The stock rose 6.8 percent on its debut and is now trading up 25.7 percent - meaning Blackstone stands to make more when it actually sells shares. Blackstone's private equity business had about $25 billion under management at the end of the third quarter. The company's shares are down from October highs of over $16. They closed at $12.82 on the New York Stock Exchange on Friday.
Blackstone is widely expected to bring Danish telecommunications operator TeleDanmark public later this year. It invested $15.8 billion in the company in late 2005. Deutsche Telekom AG, in which Blackstone holds a roughly 5 percent interest, is also considering an initial public offering or spin-off of its underperforming T-Mobile USA unit.