U.S. IPO Pricing Recap: The Crazy Chicken Flies While 8 IPOs Trade Down Or Flat

by: Renaissance Capital IPO Research

This week's 10 IPOs largely disappointed as 70% were forced to price below the proposed range and 80% closed the week up 1% or less. Before this week, only 36% of IPOs this year had first-day pops of 1% or less. The enthusiasm for last week's deals also eroded as 6 of the 8 have traded down after the first day. However, today's Tex-Mex chicken chain, El Pollo Loco (NASDAQ:LOCO), flew up 60% by end of day. Despite the restaurant's gains, recent subdued performance sows uncertainty ahead of what could be the busiest week for IPOs since 2000, especially for the wave of unprofitable biotechs.

Restaurant chain El Pollo Loco outperforms
With 401 locations primarily in California, El Pollo Loco styles itself as fast-casual quality with fast-food prices. Investors may have drawn more comparisons between it and Chipotle or Zoe's Kitchen rather than Papa Murphy's or Potbelly. With low unit and revenue growth, however, El Pollo still faces challenges after its successful IPO. The company is backed by two private equity firms, Trimaran Capital and Freeman Spogli, and it plans to use IPO proceeds to reduce debt.

The other IPOs see their valuations slashed
Nine of the ten IPOs priced below the midpoint, and seven priced below the original range. Pricing pressure continues to play a major role in getting deals completed. In the past 90 days, 44% of IPOs have priced below the range, compared with the 3-year average of 35%. The most-discounted deals were Pfenex (NYSEMKT:PFNX) and Medical Transcription Billing (NASDAQ:MTBC), which cut their prices by 54% and 50%, respectively, and broke issue on Thursday trading.

Three LBOs have weak performance
Year-to-date, the 18 LBOs in 2014 have produced an average return of 0%. TownSquare Media (NYSE:TSQ), Advanced Drainage Systems (NYSE:WMS) and Orion Engineered Carbons (NYSE:OEC) fit into that lackluster trend. IPO investors may have challenged the growth story of these large and debt-burdened companies, and remained unimpressed even after they cut their valuations.

Advanced Drainage Systems was the group's best performer, up just 1%. A former Berkshire portfolio company bought by American Securities Associates, the company manufactures high-density plastic pipes and relies on growth in non-residential construction. Another industrial LBO, Orion Engineered Carbons, is a Luxembourg-based manufacturer of the chemical carbon black, which is used in mechanical rubber and printing inks. Orion fell 1% on Friday trading. Townsquare Media, a company taken out of bankruptcy by Oaktree Capital, was the week's second worst performer, down 5%. Sewage pipes, rubber chemicals and radio stations just couldn't excite investors like El Pollo Loco.

Health care has up, down and flat IPOs
The week's only health care company with sales, Intersect ENT (NASDAQ:XENT) priced at the low end and had a healthy 15% gain by Friday close. The fast-growing company sells absorbable nasal implants that provide post-surgical relief, and is one of several July IPOs focused on sensory body parts. Innocoll (NASDAQ:INNL) also makes absorbable products, and despite being late-stage, the company priced 36% below its midpoint and remained flat. Immune Design (NASDAQ:IMDZ) also had flat performance, failing to achieve the reception that immuno-oncology biotech Kite Pharma (NASDAQ:KITE) did in June.

IPO pricings (week of July 21, 2014)
Company (Ticker) Business Deal Size ($mm) IPO Price vs. Midpoint Return as of 7/25
El Pollo Loco Holdings (LOCO) Tex-Mex fast food with 401 locations $107 7% 60%
Intersect ENT (XENT) Sells absorbable nasal implants $55 -8% 15%
Ocular Therapeutix (NASDAQ:OCUL) Biotech: absorbable eye therapies $65 -13% 1%
Advanced Drainage Systems (WMS) Plastic pipe used in construction $232 -11% 1%
Immune Design (IMDZ) Biotech: early-stage immuno-oncology $60 -8% 0%
Innocoll (INNL) Biotech: absorbable pain/infection drugs $59 -36% 0%
Orion Engineered Carbons (OEC) Carbon chemicals with industrial uses $351 -20% -1%
Pfenex (PFNX) Biotech: wet AMD treatment $50 -54% -3%
Townsquare Media (TSQ) LBO'd operator of 312 radio stations $92 -27% -5%
Medical Transcription Billing (MTBC) SaaS platform for ambulatory care $20 -50% -18%

IPO market snapshot
So far this year, 166 IPOs have raised $33.4 billion and produced an average first day return of 14%. The Renaissance IPO ETF (symbol: IPO), a float cap-weighted basket of newly public companies and indicator of post-IPO performance, has gained 2.4% compared with 7.0% for the S&P 500. Over the last 30 days, the IPO ETF has fallen 1.1%% compared with +1.0% for the S&P 500. The active IPO pipeline includes 127 companies looking to raise a total of $50.2 billion.

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