In the last two months, two private equity-backed retail groups in Australia have successfully listed on the Australian Securities Exchange. In November, Kathmandu Holdings, backed by Goldman Sachs JBWere Private Equity and Quadrant Private Equity, raised A$340 million ($316 million) from its IPO. Two weeks earlier, Myer Group, which was backed by TPG Capital and Blum Capital, raised A$2.2 billion through a public offering of its shares, making it among the largest IPOs globally to date in the year 2009.
Goldman Sachs JBWere and Quadrant led a management buyout of Kathmandu in 2006, while Myer was acquired by a TPG-led a consortium including Newbridge Capital and the Myer family office in the same year for $A1.4 billion.
Notwithstanding the fact that these two companies managed to take advantage of the increasing confidence in the public markets, their IPOs fell below expectations. Kathmandu, for instance, planned to raise as much as A$374.9 million from its IPO. The company intended to price its shares in the range A$1.65 to A$1.90 per share, but ended up pricing them at A$1.70, near the lower end of the indicative range. Myer Group, on the other hand, had marketed its IPO in the indicative price range of A$3.90 to A$4.90 per share. The company ultimately sold its shares at the lower end of the range as well, at just A$4.10 per share.
And while Kathmandu’s shares have done well since they went public, trading at more than the listing price of A$1.70, Myer shares got a lukewarm response and started trading at a discount of about 9 percent. Since the company’s first day of trading on 2 November, its shares have consistently traded at a discount to the original selling price of A$4.10.
All this goes to show that while the public markets are open for business, providing a potential exit route for private equity firms, investors’ willingness to lap up shares is greatly determined by their pricing.
Mark Delaney, chief investment officer of superannuation fund AustralianSuper, says the IPO window is still vulnerable to closing as quickly as it opened. “The outlook will be clearer after Christmas,” he says. “If the Christmas period is strong, Myer and Kathmandu share prices will hold up and a fresh wave of retail floats will appear in the first half [of 2010].”
This uncertainty has been compounded by the ambiguity surrounding TPG’s tax obligations following the sale of its stake in Myer Group.
The Australian Taxation Office (ATO) has attempted to take action against TPG, which it claims owes A$452.2 million in capital gains tax on the proceeds of the sale of its shares in Myer. The ATO has also attempted to slap the global private equity firm with an A$226.1 million penalty for allegedly avoiding tax.
TPG has disputed the claims and said in a statement that it has at all times complied with Australian taxation laws and will continue to do so. “We intend to cooperate fully with any inquiry they [the ATO] make as we have done in the past,” the firm added.
While it is too early to say what the result of this will be, what has come to the fore is the uncertainty surrounding taxation issues and private equity in Australia. Mark Stanbridge, a partner at Sydney-based law firm Blake Dawson, says: “There needs to be clarity in relation to this sort of thing as to how these tax amounts are characterised – are they based on capital or revenue?”
“As long as there is uncertainty, it is going to negatively impact the private equity sector and investment by private equity – particularly through foreign structures and more particularly the investment by private equity in the Australian economy,” he says. Private equity players will be closely watching these events play out.
In the meantime, Sydney-based Archer Capital has appointed three banks to advise on the listing of portfolio company Ascendia Retail. It is estimated the IPO could fetch between A$800 million and A$1 billion. The IPO is scheduled for next year, and if Delaney is right, how the company fares will provide a clearer outlook for the market.
However, it may be a while yet before we more private equity firms looking to list their portfolio companies.