Leonard Green's Tempting IPO

By Will Ashworth | March 29, 2010 AAA

So far, in 2010 there have been 28 IPOs in the United States. This compares with five for the first three months of 2009. Clearly, the IPO doldrums we were in are over and good times should follow. At least, if you're a private equity firm. Two years ago, it became obvious investments made prior to the economic meltdown were going to take longer to exit than originally planned. Now that both the credit and IPO markets have stabilized, investment bankers will be busy. An attractive IPO that hasn't taken place is the Container Store, the Texas-based retailer acquired by private equity firm Leonard Green & Partners in 2007. Now that retail's recovering, its shares would be awfully enticing. I'll look at the reasons for and against such a deal.

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A Little History
Late in 2009, HEC School of Management professor Oliver Gottschalg released a list of the world's top performing private equity firms between 1996 and 2005. Number one on the list was none other than Leonard Green & Partners. The average firm on Gottschalg's list earned investors $2.25 for every dollar invested compared to $1.59 for the private equity industry as a whole. Green's investors have done well for themselves. Perhaps it's time for Leonard Green & Partners to give retail investors a little taste. After all, KKR's recent IPO filing values the firm at $7.3 billion. It's not even in the top 10. Imagine what the number one performing private equity firm could get in an offering.

Retail Experience
In 2000, Leonard Green and Partners along with Texas Pacific Group bought Petco for $600 million. The two private equity firms invested $200 million in the deal. Between 2002 and 2004, they realized profits upwards of $1 billion taking it public. In 2006, the two firms repurchased Petco for $1.8 billion ($29 a share) despite the fact Petsmart (Nasdaq:PETM) offered $33 dollars a share. A subsequent class action lawsuit filed by Petco shareholders in 2006 is in the last stages of a settlement that will see former shareholders receive $16. Will Leonard Green step up to the IPO plate once more? If there's money to be made, you know they will.

In 1992, Leonard Green and management bought Big 5 Sporting Goods (Nasdaq:BGFV) for $150 million. Five years later, CEO Robert Millar paid $250 million for 30.8% of the company, reducing Green & Partners stake from 67% to 36.2%. Already sitting on an estimated profit of more than $200 million, it sold off the rest in October 2003 for an estimated $100 million gain. Today, Leonard Green & Partners owns Sports Authority, the biggest sporting goods retailer in America other than Dick's (NYSE:DKS) and Foot Locker (NYSE:FL). Additionally, it owns a 17.4% interest in Whole Foods (Nasdaq:WFMI). Former investments include FTD, which it sold to United Online (Nasdaq:UNTD) for $800 million in 2008 and Dollar Financial (Nasdaq:DLLR), which it took public in 2005. I estimate Leonard Green & Partners made $154 million over eight years from an original investment of $41 million. No wonder it finished at the top of the professor's list.

For and Against
The main reason to proceed with a Container Store IPO at this point, only in its third year under Leonard Green & Partners ownership, is retail stocks are hot. As of March 12, more than half the 31 retail stocks in the S&P 500 were within 2.5% of their 52-week highs. Teen fashion retailer Rue 21 (NYSE:RUE) went public in November at $19 a share (above the $16-18 proposed range) and is now trading above $35, up 85% since the IPO. In fiscal 2009, Rue 21 generated $525.6 million in sales and $22 million in net income. It sold 28.5% of the company for $128.5 million, valuing the entire business at $450 million or less than one times sales.

While it was able to price its shares above the proposed range, it still didn't get a huge valuation on a price-to-sales basis. This may have been intentional to create further demand once going public making some quick money for new and existing investors. The main reason Leonard Green shouldn't proceed is they bought the Container Store to help it expand. Unfortunately, the recession slowed most retailer's growth plans. This delay probably added two years to any holding period they might have contemplated when the deal was completed back in 2007. That's okay. If the economy continues to recover, they'll be looking at a much more generous valuation when they do go public.

The Bottom Line
The Container Store is one of the most interesting retail businesses in retail. It's no coincidence it made the Fortune 100 Best Companies To Work For list. They're good. Leonard Green knows this. The private equity firm won't exit its investment until the retailer is located in every major market in America, and that'll take a few years. (To learn more, check out our IPO Basics Tutorial.)

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