IPO VIEW-IPO investors want LBO companies to pay down debt

Fri Jan 14, 2011 8:34pm EST
* Paying debt attractive to investors, can raise IPO value
* Nielsen, HCA and Toys R Us all using IPOs to pay debt
* Private equity could take long time to exit investments
By Clare Baldwin

NEW YORK, Jan 14 (Reuters) - Private equity firms are
finding that selling shares in a company they own is not
exactly the same as exiting the investment.

Traditionally, private equity firms sell companies they own
to public investors through an initial public offering. After
the IPO and a few follow-on offerings the firm's investment in
the company would be over.

But now, IPO investors are demanding that private equity
firms hold their stakes in the IPO and use proceeds from the
initial offering to pay down debt. That means that private
equity firms are left holding the same amount of equity, and
their only hope for exiting their investments is future
follow-on offerings.

The trend could affect some of the biggest IPOs of the
year, including Nielsen Holdings, best known for its TV
viewership ratings; hospital operator HCA Holdings Inc; and
retailer Toys R Us Inc.

Investors are looking for companies to reduce their risk by
reducing their debt -- liabilities can push a company into
bankruptcy if they can't be refinanced when they mature.
Profits also increase when a company no longer has to pay
as much in interest.

"Paying off debt is something that investors are
comfortable with," said Jay Ritter, a finance professor at the
University of Florida.

Take Nielsen, for example. Its IPO is backed by private
equity firms Carlyle Group [CYL.UL], Blackstone Group LP
(BX.N), Kohlberg Kravis Roberts & Co [KKR.UL], Thomas H. Lee
Partners, AlpInvest Partners and Hellman & Friedman, and is set
to price a roughly $1.5 billion IPO at the end of the month.
It will be the first major buyout-backed IPO of 2011, and
proceeds from the deal will go almost entirely toward paying
off debt.

Like most companies that go private, Nielsen has a lot of
debt. As of Sept. 30 it had $8.6 billion, including lease
obligations, compared with total assets of $14.4 billion.
Nielsen is not a fast-growing company, and paying down debt
is likely its best bet for boosting earnings, said Nick
Einhorn, an analyst at Connecticut-based IPO investment house
Renaissance Capital.

"Investing the IPO proceeds in the business is not going to
spur them into hyper-growth mode. As far as what can drive
earnings growth it makes more sense to pay down debt," Einhorn
Source: Reuters.Com