In financial circles, deals are often described by their vintages, like fine wine.
Perhaps wine aficionados can give disappointed and disillusioned investors a few choice words to use in describing the 2020 and 2021 vintages of initial public offerings. “Undrinkable” is one of the milder terms that comes to mind for this series of stock market debuts, which have almost all plunged in price. “Plonk,” “corked” and “vinegar” would also apply.
Coming out of the pandemic, the Street unleashed an unprecedented wave of Canadian IPOs. In 2020, 77 companies raised $5.5-billion. The following year, 171 offerings raised a record $10.2-billion. Most of these stocks now trade for fractions of their IPO prices.
The problem with having served up a series of lacklustre IPO vintages is that discerning investors are now avoiding the new-issue market. That’s a headwind for investment bankers, who have seen a torrent of IPOs slow to a trickle.
But the Street can make money even when deals fail. The lawyers and bankers who profited from pushing IPOs are now collecting another round of fees to take many of these companies private, for far less than they fetched when they debuted on public markets.
The poor performance of the most recent vintages of IPOs, and the bad taste they left in investors’ mouths, is a much larger issue for companies such as Telus Corp., and private equity fund managers such as Onex Corp., which were counting on public market offerings to achieve their strategic goals.
Telus T-T launched what it expected to be the first in a series of IPOs in the winter of 2021 by spinning out its customer experience division, Telus International (Cda) Inc., at US$25 a share. The $1.4-billion offering marked the Toronto Stock Exchange’s largest technology debut.
Telus chief executive officer Darren Entwistle envisioned following up this landmark deal with offerings from the company’s health care and agriculture divisions. Lofty valuations on each of these spin-outs were expected to reward shareholders in the telecom company, and raise cash for the expansion of both the offspring and the parent.
Telus International has been a massive disappointment for investors who bought the IPO. The stock price has dropped 70 per cent since it first began trading. Any plan to sell stakes in Telus Health or Telus Agriculture to the public is going to require a reversal in fortune at Telus International. Mr. Entwistle’s grand vision is now on hold.
For private equity funds, poor performance from IPOs crimps an approach to making money: buying companies, fixing them up, then cashing out by selling either in public markets or to other fund managers.
Onex Corp. ONEX-T, for example, will want to sell WestJet Airlines Ltd. in the not-too-distant future. It acquired the carrier in 2019 for $5-billion. The preferred flight path was always an IPO for the airline, which has beefed up its overseas and vacation businesses. Until sentiment shifts, it’s hard to imagine investors burned by past private equity offerings rushing to buy shares in a cyclical airline play.
In private equity circles, all the action is around buying companies that have flopped since their public debuts. Out of the 20 tech companies that went public on the TSX in 2020 and 2021, seven are now being taken private.
Software company Q4 Inc. QFOR-T agreed to a buyout at $6.05 a share from Silicon Valley-based Sumeru Equity Partners, a bid that is barely half the company’s $12-a-share IPO price. Agricultural software play Farmers Edge Inc. FDGE-T went public at $17 a share. Controlling shareholder Fairfax Financial Holdings Inc. FFH-T is now offering to put long-time backers out of their misery by buying them out at $0.25 a share.
Disastrous performance from two years’ worth of IPOs does more than just hurt the reputation of dealers, and contribute to investor cynicism. Bad vintages in ‘20 and ‘21 are holding back growth strategies at flagship companies such as Telus and Onex. It’s going to take several years, and a few successful stock market debuts, to get the taste of plonk off of investors’ palates.
Andrew Willis