NEW YORK (Reuters) – Shares in RailAmerica Inc (RA.N), which owns and operates freight railroads in North America, fell as much as 8.2 percent in their debut on Tuesday, in a sign that the appetite for private equity-led IPOs may be weak.
Unless RailAmerica shares rally, the U.S.-listed IPO will be the 11th out of 16 launched since September to fall below its offer price, despite the much-vaunted IPO recovery.
Florida-based RailAmerica, which is owned by private equity funds managed by a unit of Fortress Investment Group LLC (FIG.N), sold 22 million shares for $15 each on Monday. It had expected them to price for between $16 and $18.
Fortress unloaded 1 million more shares than it had said it would.
The poor debut follows that of hospital operator Select Medical Holdings Corp (SEM.N) in late September when it priced below its estimated range. It is still 2.7 percent under its IPO price. Select Medical’s largest stakeholder was private equity firm Welsh Carson Anderson Stowe.
A number of private-equity backed IPOs this year have raised less money than expected and fallen in their debuts in what could be a warning for big-name IPOs waiting on deck not to overprice their deals even as they seek to take advantage of the market rally to unload portfolio companies.
“You are seeing more aggressive pricing, which makes sense because private equity owners want to cash out and want as much as possible,” said Eric Guja, a research analyst with Connecticut-based investment firm Renaissance Capital.
Private equity firm Blackstone Group (BX.N) plans to list as many as eight portfolio companies, a source who received a letter the firm sent to investors told Reuters earlier this week.
Two buyout-backed IPOs in the pipeline include those of Kohlberg Kravis Roberts & Co’s [KKR.UL] Dollar General, which is expected to launch a $750 million IPO by year’s end, and Blackstone’s Team Health Holdings Inc, a hospital staffing company that filed earlier this month for a $100 million IPO.
Still, some private-equity backed IPOs have performed well this year. Talecris Biotherapeutics Holdings Corp (TLCR.O), a maker of plasma-based protein therapies that is owned by Cerberus Capital Management LP [CBS.UL], priced its IPO at the top of the estimated price range in September and rose 11.3 percent on its first day.
Avago Technologies, a KKR-owned chipmaker, is up 9 percent since its August IPO.
RailAmerica shares, which had already priced below expectations on Monday, started trading at $14.35, or 4.3 percent below the IPO price, and continued to fall. They hit a low of $13.77 and traded late Tuesday afternoon 7.7 percent weaker at $13.87 on the New York Stock Exchange.
Guja said RailAmerica may have faltered because it was not priced well compared to its closest rival, Genesee & Wyoming Inc (GWR.N). Investors typically want new stocks priced at a discount to similar stocks that have a track record and have analysts covering them.
Making matters worse, the poor start this morning created a self-perpetuating slide, Guja said.
“Once a stock breaks the IPO price, people have a tendency to dump a stock if they aren’t long-term investors,” he said.
But Guja praised the company’s efforts to cut costs and which help RailAmerica’s profit margin when rail transportation volumes recover.
RailAmerica’s debut marks the company’s return to the Big Board following a $1.1 billion buyout by Fortress in February 2007.
RailAmerica plans to use the net proceeds of about $150 million mostly to pay down debt. Fortress still owns about 55.8 percent of RailAmerica, following the IPO.
(Reporting by Phil Wahba; Editing by Dave Zimmerman, Gunna Dickson and Richard Chang)