U.S. IPO Pipeline Update: Major LBOs ServiceMaster And Michaels Set Terms For IPOs Next Week

Includes: MIK, SERV
by: Renaissance Capital IPO Research

With a $700 million IPO expected to price next Wednesday, ServiceMaster (NASDAQ:SERV) led the group of nine IPOs that set terms since last week's Pipeline Update, followed by Michaels (NASDAQ:MIK), which could raise $500 million when it prices next Thursday. Over the past three weeks, 33 deals have been added to the IPO calendar. Excluding two blank check companies, June could see 38 IPOs or more, the most IPOs in one month since the tech bubble, with the closest being 31 in October 2004. The IPO market has fiercely rebounded from its lows in May, as measured by the Renaissance IPO ETF (symbol: IPO), which has gained 9% since then but is still 4% below its peak in March. Actual IPO returns are also encouraging: 14 of the 15 IPOs in the last 30 days now trade above their issue price, and the whole group averages a 23% return. The rush of IPOs to set terms is the result of positive trading and a backlog from May's lower-than-expected issuance. Of note, none of the 9 terms filers in the past week have been biotechs, compared with last week's seven.

ServiceMaster, LBO'd by Clayton, Dubilier & Rice in 2007 for $4.7 billion, generates most of its revenue offering termite and other pest control services as well as warranties on major appliances and home systems. The company recently spun off its TruGreen lawn care business but still offers other building maintenance services for residential and commercial customers. Another LBO now set to IPO, Michaels is the largest arts and crafts retailer in North America. The company is set to raise $500 million and is owned by Bain Capital and Blackstone, which bought the company in 2006 for $6 billion. Michaels carries a heavy debt load on its balance sheet because of the LBO, further impacted by an $800 million dividend in 2013 funded by PIK toggle notes.

Materialise (NASDAQ:MTLS), a Belgian company offering 3D printing software, industrial products and customized medical devices, set terms to raise $104 million and price next week. After a multi-year surge, 3D printing stocks have struggled mightily in 2014: Last year's IPOs ExOne (NASDAQ:XONE) and voxeljet (NYSE:VJET) are down 49% and 60%, respectively, this year, but still trade above their IPO prices. Controlled by Sterling Partners, Adeptus Health (NYSE:ADPT) operates the largest freestanding emergency room network in the US, and is set to raise $100 million next week.

Xunlei, which offers a cloud-based freemium product that increases internet speeds, is expected to raise $73 million next week. The company previously set terms to raise $114 million in a July 2011 IPO, but since it withdrew, Xunlei has altered its business model by removing all ads from its flagship product. It is set to be the tenth Chinese IPO of 2014 (there were eight in 2013), and after its offering Alibaba (ABABA) and Chukong Technologies (Pending:NEXT) will be the only two remaining Chinese companies in the IPO pipeline. Imprivata (NYSE:IMPR), another technology company, is expected to raise $75 million next week. Like MobileIron (NASDAQ:MOBL), its software helps protect sensitive enterprise data by supporting an authentication product, but Imprivata is focused almost exclusively in the health care industry. TCP International (NYSE:TCPI), which manufactures LEDs and compact fluorescent lights in China and sells its products globally, set terms to raise $100 million next week. The company's business benefits from a global phase-out of incandescent bulbs, and it has partnered with a mobile platform provider to differentiate itself by entering the lucrative home automation space.

IPO terms filings (June 11, 2014 to June 18, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
ServiceMaster Global (SERV) LBO'd provider of pest control and appliance warranties $700 $2,312
The Michaels Companies (MIK) LBO'd arts and crafts retailer $500 $4,629
Materialise (MTLS) 3D printing software and products $104 $99
Adeptus Health (ADPT) Largest freestanding ER system $100 $121
TCP International (TCPI) Energy-efficient light bulb manufacturer $100 $440
Amphastar (NASDAQ:AMPH) Difficult-to-manufacture generic drugs $81 $223
Imprivata (IMPR) Authentication software for doctors $75 $76
Xunlei (NASDAQ:XNET) Internet acceleration services $73 $175
Medical Transcription Billing (NASDAQ:MTBC) SaaS for health care operations data $30 $11

Following the strong performance of energy IPOs, spinoffs and yield plays, Shell Midstream Partners, LP (NYSE:SHLX) filed for a $750 million IPO this morning. North America's largest replacement tire distributor, ATD (ATD.RC), filed for an IPO that we estimate could raise $500 million or more. The company originally filed for an IPO in 2010 but was acquired by TPG for $1.3 billion. ATD will be the second IPO of the year related to the auto industry, following last month's TrueCar (NASDAQ:TRUE) IPO. Ironshore (Pending:IRSH), like last week's Avolon (NYSE:AVOL) filing, was founded with a $1+ billion investment from private equity firms, which are selling the entire offering. The company competes with OneBeacon and HCC Insurance in the international specialty property and casualty insurance market. With about $110 million in adjusted EBITDA, Ironshore's $100 million deal size is likely a placeholder. Another P&C insurer, Trupanion (NYSE:TRUP), filed to raise $75 million. It provides medical insurance coverage for cats and dogs. Plymouth Industrial REIT (Pending:PLYM), which owns rentals in 24 industrial buildings across five states, filed for a $173 million IPO. Two more biotechs were also added to the pipeline, one treating a deadly epileptic condition [Sage Therapeutics (NASDAQ:SAGE)] and the other developing an advanced drug delivery system to treat tumors at the source [Silenseed (Pending:RNAI)].

IPO initial filings (June 11, 2014 to June 18, 2014)
Company (Ticker) Business Deal Size ($mm) LTM Sales ($mm)
Shell Midstream Partners, LP (SHLX) Operates Shell pipelines in Louisiana $750 $100
ATD (ATD.RC) TPG-backed tire distributor $500* $3,604
Plymouth Industrial REIT (PLYM) REIT owning industrial buildings $173 -$1
Ironshore (IRSH) Specialty P&C insurer $100 $1,395
Trupanion (TRUP) Medical insurance for cats and dogs. $75 $92
Sage Therapeutics (SAGE) Biotech: treatments for deadly seizures $69 $0
Silenseed (RNAI) Biotech: targeted cancer delivery system $35 $0
* Renaissance Capital estimate

IPO market snapshot

So far this year, 128 IPOs have raised $26.5 billion and produced an average first day return of 10%. The Renaissance IPO ETF (symbol: IPO), a cap-weighted basket of newly public companies and indicator of post-IPO performance, has gained 3% compared with 5% for the S&P 500. Over the last 30 days, the IPO ETF has risen 8% compared with 4% for the S&P 500. The active IPO pipeline includes 125 companies looking to raise a total of $50.1 billion.