If your numbers are correct, then the family vendors of Inghams were inordinately poorly advised.
Because anyone with a remote knowledge of corporate finance would have known how much capital was able to be liberated from the business by any new owner who was inclined to doing so.
As for your question about why a float of this nature might get off the ground, when there are perfectly good investment alternatives already on offer, I'm afraid I have no definitive answer for you given I have long ago learnt that there is no accounting for the madness of the crowds.
Because you are right; this is the pro forma methodology of Private Equity.
The script can be summarised as:
1. Buy Business off Muppets.
2. Strip Assets
3. Harvest Proceeds
4. Gear Up
5. Harvest Debt Raising Proceeds
6. Rip Costs to the Bone
7. Window Dress Business For Sale
8. Float Business to Muppets (sometimes the very same Muppets the business was bought from some years prior)
And people get stung time and again buying businesses off Private Equity (The Dick Smith debacle is the poster child for this), for some inexplicable reason.
Maybe the Ingams float will fly because investors will think that this time it is different.
For I have long ago noticed that - for reasons that I can't quite dimension - IPOs and floats always seem to generate a level of heightened excitement. Maybe its the newness of it all and the novelty of having a new ticker to trade.
But most likely it is because institutional investors can't resist being part of the herd, and that they feel obliged to participate in these sorts of primary issuance situations because "hey, everyone else is, and if everyone else is, then I'd better too, in case this one is a winner and I might look stupid having missed out."
On a less flippant note, I think the reason institutional investors buy into these situations is mostly for technical reasons that relate to the composition of benchmarks indices.
For example, at $1.5bn market cap, Inghams is likely to be included in major stock indices before long. Benchmark-aware fund managers (i.e., basically all of them) would have to own a certain amount of the stock for purposes of keeping portfolio tracking error down. (So, they would be buyers of the stock irrespective of what they might think about the business fundamentals or its valuation.)
So many of them treat the float as a once-off liquidity event that allows them to get set in the stock, rather than have to stand in the market for weeks on end trying to build a position.
It's very often a case of Fund Manager saying to Stockbroker:
"How big is the company you are floating? Wow, that big? Well, I better buy it, in that case. Put me down for $10.0m worth of stock at the issue price."
So there is always some natural passive buying that occurs for this sort of technical reason.
Happens all the time.
Professional fund managers buying shares for their clients in businesses that they don't really like or that they don't necessarily think are good investments: a very strange system.
Me, I will never apply for shares where the vendor is a private equity player.
Because those guys are waaaaaaay smarter than me, and in a game played for money when its Private Equity vs Madamswer, I know I'll get by caboose handed to me on a plate 9 times out of 10. So I know to never take a seat at the table.
Of course, when a government of some shape or form offers to sell me some, then I step right in with my pen all poised to sign the biggest cheque I can.
Because governments tend to leave the lemon full of juice left to be squeezed out.
While the lemons distributed by those cunning Private Equity folk not only have no juice left in them, but they invariably actually come with juice vacuums, meaning that their new owners have to suffer some pain in the form of injecting juice back into those particular lemons.
(If you'll pardon the clunky and now-laboured lemon analogy.)
REH Price at posting:
$37.26 Sentiment: Buy Disclosure: Held
(20min delay)
