Collins Foods IPO falls short

At press time, company shares were trading at A$2.09, down almost 9 percent from the previous day's close.The listing of the Australian KFC and Sizzler franchiser had been deemed the sole bright spot in the local IPO market since the disappointing flotations of department store chain Myer Group and camping equipment retailer Kathmandu in late 2009. The worse-than-expected results of the two companies during flotation and poor performance since have been frequently cited as the main deterrent for firms eyeing a release on the public market. KFC’s position as Australia’s most popular chicken fast food chain and management’s long track record had been touted as the company’s key selling point by various Australian media outlets.

Other portfolio companies of Australian private equity firms to have recently shelved IPO plans include Pacific Equity Partners' Hoyts cinema chain, Archer Capital's Rebel Sports and Gresham Private Equity’s Barminco.

To its credit, Collins Foods made its public debut at a time of considerable turmoil in the world’s markets.

The company started trading on the ASX on 4 August, which according to local reports, was the same day the benchmark S&P/ASX 200 index closed down 1.3 per cent, near 13 month lows. As a point of reference, shares of Drill Torque, a non PE-backed contract mineral and energy drilling company which listed on the ASX 2 days prior to Collins Foods, closed at a A$0.055 cent premium to its issue price of A$0.20. At press time, that company shares were trading at A$0.210 per share, down 12.5 percent from its previous close.

The poor performance of the current IPO market has also been attributed to increased competition from the global secondaries market, as US and European banks and financial institutions, in a bid to streamline operations, have begun to put non-performing and distressed assets up for sale en masse.

“Because the secondary market is under pressure, it's very hard for IPOs to outperform,” Naz Ressas, a portfolio manager at Australian superannuation Colonial First State, told The Australian.

“The vendors know their IPOs are worth more but they're not going to get it in the secondary market. The IPOs are competing against a very cheap secondary market,” he added.

Some PE-backed businesses that were on track for IPOs but instead ended up being sold to trade buyers or other PE firms include Ausco from Unitas Capital to UK firm TDR Capital and Champ Ventures’ Healthe Care to Archer Capital.

Last month, a study by the Australian Private Equity and Venture Capital Association (AVCAL) which analysed data from all IPOs valued above A$100 million from October 2003 to November 2010, found that private equity-backed listings reaped average returns of between 4 percent to 78 percent over periods ranging from one day to three years after listing, while non PE-backed IPOs gained average returns of between -2 to 4 percent.

The results also showed that PE-backed IPOs’ outperformance tended to increase over time. The average share price of PE-backed stocks grew by 1.78 times over a three year period after listing compared to non-PE stocks which averaged 0.98 times their listing price. PE backed IPO average share prices were also higher after one day, one week, six months, one year and two years post listing.

Since Collin’s listing, the full extent of the dismal public market conditions has become even more apparent north of the equator, where the recent downgrade of the US’ credit rating coupled with market uncertainty over the European debt-crisis continues to manifest in various forms.