Investors cheered the launch of DigitalGlobe, Inc. (DGI) Thursday as only the fifth major IPO of 2009. Shares were offered to the public at a price of $19 and immediately began trading at a premium. While the stock touched $25 initially, it backed off in mid-day trading to a range in the mid $21 area. Still this is quite impressive given that the stock was expected to be offered between $16 and $18.
The fact that the stock was priced above the expected range is a testament to the liquidity that has re-entered the market in recent months. Typically a pricing above the range leads to a solid initial stock performance and DGI was no exception. The shares were underwritten by Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) - two well respected leaders in the syndicate business.
When a new IPO is issued, it is always important to ask who is receiving the money being raised by the underwriter. Typically I am more fond of deals where the company is raising money for growth prospects. In the case of DigitalGlobe, the shares were largely being sold by private investors and very little capital went directly to the company. Private shareholders exiting is not always a bad thing, but should definitely be looked at carefully.
In this case, the 14.7 million shares sold to the public accounted for only 32.7% of the company. The majority is still being held by private shareholders and these shares will be locked up for some time. On one hand, investors may need to be cautious as the locked up shares will likely eventually come to market and could pressure the price of shares in several months. On the other hand, its encouraging to note that the private investors have kept so much of the company for themselves. This likely means that they have some confidence in the long-term prospects.
DigitalGlobe is actually a profitable satellite imagery firm with two satellites currently in orbit and a third to be launched in the fall. The company gets about 75% of its revenue from the US government and should benefit from the Obama administration’s commitment to using satellite images for intelligence purposes. At the same time, DigitalGlobe also courts emerging governments as well as private customers like Google for additional contracts.
The company enters the public market with $341 million in debt, which is fairly typical for new IPOs. Private equity owners often load up the company with a moderate amount of debt (pulling their own capital out) and then offer the leveraged company to the public. The debt level is something to watch, but with net income of $53.8 million in 2008 and a stable customer in the form of Uncle Sam, the debt should be manageable.
It will take a bit of time for analysts to develop and distribute long-term earnings models for the company. It currently looks like Morgan Stanley, JPMorgan, Citigroup (C), Merrill Lynch, and Jefferies (JEF) were all on the deal which means that they will not be able to issue an opinion to clients for some time. But it appears the stock is trading at less than 20 times earnings which could offer an attractive value to investors.
Investing in IPOs is an inherently risky business and one should tread carefully with stocks that have limited trading history. With that said, IPOs also offer exceptional opportunities for aggressive traders.
DigitalGlobe’s offering is an exciting milestone for this market indicating liquidity not seen for some time. It will be quite telling to see how the stock is able to hold up over the coming weeks.