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Accelerated IPO to threaten UK buyout prices?

Two more accelerated IPOs are in the offing, following on the heels of the Northumbrian Water and Center Parcs deals last year. The first is Torex Retail, a predominantly UK supplier of solutions to the retail sector, including Argos, Selfridges and Tesco, specialising in electronic point of sale and back office systems, which is part of iSOFT Group. Torex Retail announced its intention to float on the London Stock Exchange’s Alternative Investment Market on February 17. The second is Centaur Communications, the publishing group responsible for such titles as The Lawyer, The Engineer, Marketing Week and Money Marketing. Centaur’s proposed accelerated IPO leaked into the press late in January but has yet to materialise.

One commentator closely linked to accelerated IPO deals notes: “What’s worrying some of the VC houses is that they need a certain rate of return whereas public market investing institutions don’t look for that sort of return from the stock exchange. Their hurdle is so much lower so there is the potential always for them to bid a higher price at the outset.” It is almost certain that cash generative businesses like Torex Retail and Centaur Communications would have attracted VC interest.

The willingness of institutional investors to get involved in such transactions is partly down to their frustration over the number of companies that have delisted from the stock markets in public-to-private transactions only to reappear in the market at a later stage, earning the VC a considerable profit on its investment and leaving the institutions feeling undersold at the time of the delisting. This goes some way to explaining why those institutional investors are now willing to commit to the accelerated IPO option, effectively backing management and cutting out the VC.

On management’s part, working with institutional investors can be potentially more lucrative than with VCs. For example, in the Torex Retail deal, which will list on March 2, management is understood to be sharing a 20% stake in the equity. With VCs as their backers they would be more typically looking at sharing a 5% to 6% stake between them.

The Torex Retail deal also shot VCs other good argument for choosing them down in flames since the transaction was virtually guaranteed to go ahead thanks to the institutional investors agreeing to fund nearly one-third of the purchase price upfront. The rest of the monies were allocated on condition of the float going ahead, which ought to be considered fairly low risk with the commitments made and the IPO process accelerated to just seven days. VCs, for their part, when agreeing any transaction, have tended to push the fact of their ability to fund the deal in one payment as a sign of their ability to deliver ahead of potential rivals. Given the Torex Retail structure this argument is significantly weakened. (Northumbrian Water and Centre Parcs were funded wholly on flotation.)

But the picture for VCs is by no means all doom and gloom. For one thing only certain types of business will be appropriate for listing and only certain types of management will fit the public institutional investor profile. And it is by no means certain how large the community of public investing institutions’ appetite is for such deals, or whether that appetite will be retained.