You know those passengers who line up early in airport lounges, to get their seat on a flight?
That's the retail investor crowd, when it comes to Porter Aviation Holdings. Mom & Pop shareholders just can't wait to get aboard this $120-million initial public offering.
With Porter in the final stages of road shows - management plans to keep pitching until Wednesday - sources in the banking community report there is terrific demand from individual shareholders for an airline that sports a sterling reputation in an easily-understood sector.
Now, you know those passengers who hang out in the bar, bookstore or coffee shop until longer after their flight is called, then saunter up to take their seat once the masses have boarded? That's how institutional investors are looking at Porter.
With this high-profile IPO expected to price by the end of the week, fund managers are playing a poker game with Porter, attempting to stare down the airline and its team of underwriters, led by RBC Dominion Securities. The institutions' goal is to end up owning this airline on the best possible terms. They may get their way. They may also get their bluff called.
Porter is attempting to land its debut in the midst of a turbulent market. Equities were in freefall on Monday, and U.S. initial public offerings are being scaled back left and right, simply to get stock out the door. Several Canadian IPOs have been pulled due to weak demand, while companies that did make it out promptly tanked - we're talking about you, Athabasca Oil Sands.
Institutional investors are trying to use the generally lousy tone of the new issue market to their advantage, by forcing Porter and the dealers to price the offering at the low end of the expected range, which is $6 to $7 a share. They are betting that CEO Robert Deluce and the company's private equity fund owners would rather sell stock at a reduced price than have an airline IPO crash.
One of several levers that the institutions can pull: Mr. Deluce and the rest of the owners - OMERS, EdgeStone Capital Partners, GE Asset Management and Dancap Private Equity - aren't cashing in with the IPO. Porter is selling the public a 30 per cent stake in itself to raise money that is earmarked for expanding its fleet and paying down debt. Institutions will push the logic that the airline's backers can afford to give a little on the IPO, and make their real money down the road, when they sell their stakes.
Porter also sports a relatively aggressive valuation, with investors being asked to buy into an airline that did just $7.9-million of EBITDA in its last fiscal year - that's the 12 months ended Dec. 31, 2009 - but is expected to churn out $100-million of EBITDA annually in the not-too-distant future. Institutions are pushing for a valuation that reflects what the airline is pulling in right now, not what it might make down the road.
It's not that institutional investors are refusing to get on board Porter. They are just waiting until the last possible moment to throw in IPO orders, knowing that the dynamics of this deal favour investors. In a hot IPO, institutions are rewarded for stepping up early in the process. Here, fund managers benefit from keeping the dealers twisting.
RBC Dominion and the rest of the underwriters just might be able to call the institutions' bluff. During the income trust boom, strong demand from individual investors was enough to float IPOs for a number of trusts staging deals the same size as Porter's IPO.
However, a new ownership group that is totally lacking representatives from Canada's mutual funds, insurers and pension funds is not in the airline's best interest. Over time, institutional investors will be essential to Porter, as they have the patience and capital needed to build the business, and eventually cash out the company's private equity backers.
The fearless prediction here is that the Porter IPO will fly, but at the low end of the range put forward by the airline and its underwriters. Institutional investors are the first class flyers on this IPO, and Porter will do what's necessary to ensure the money managers climb aboard.