2016_05_16 Market Thoughts

We like to look at the IPO and M&A market to get a feel for how frothy the market feels. While the market is expensive on historical measures including the P/E ratio, the IPO and M&A markets certainly don't feel overly frothy currently. We'll discuss each in some detail. 

IPO Market Continues to be Incredibly Subdued

The IPO market continues to perform very poorly. WSJ has an article out the lack of IPOs so far this year. The following chart tells the story quite simply. 

http://www.wsj.com/articles/will-ipos-pick-up-june-will-tell-1463218382

http://www.wsj.com/articles/will-ipos-pick-up-june-will-tell-1463218382

So what is going on? Well:

  1. We did have the worst start to the year ever in January. This was followed by a 10%+ melt-down the S&P over the next few weeks in February when the market turned around and ripped up. Good luck with an IPO in that market. You had to have either a killer product or really have to go to market for one reason or another.
  2. No really large companies have chosen to go public this year. Uber, Airbnb, etc. are all on the sidelines. this affects the total deal values
  3. The bid/ask between private and public valuation is likely quite large at the moment. That should shrink as companies no longer receive the same level of funding in the private market and the VCs push for an exit.  

So what are the 18 companies that have gone public in 2016? 

  1. Ten have been biotech/health care which we skip due to a lack of any knowledge in this space
  2. Three financials
  3. Two technology which we also skip due to a lack of knowledge
  4. Two consumer goods
  5. One casino

We'll cover the financials today and save the rest for later this week. 

Financials

  1. Yintech Investment Holdings (YIN) - YIN describes itself as "the largest online provider of spot commodity trading services in China by customer trading volume". We will pass on a Chinese commodities exchange

  2. Bats Global Markets (BATS) - BATS is a stock exchange in the US that famously blew its first offering...on its own exchange. That took a couple of years to come back from. We will add it to our watchlist under the exchange sector but are unlikely to ever own 

  3. MGM Growth Properties (MGP) - This is a fun one. MGM Reports (the casino company) IPO'd its real estate after coming under pressure from activists. The general idea in this situation is (i) REITs (MGP) trade at a higher multiple than operating companies (MGM). Therefore if you spin/IPO a REIT the value of combined should increase...sometimes this works, sometimes it doesn't. In the end it's basic financial engineering. 

         Concentration of "tenants" in REITs matters. MGP's only tenant is MGM. You have to be                very comfortable with MGM to invest in MGP. Without doing a lot of research to support this          conclusion, we aren't.    

 

M&A Is Still Going

Predictions of M&A's demise have been premature although deals are down vs. the record prior years. In many ways this is a positive sign as buyers pause and reassess prices they are willing to pay. In addition, the government has likely scared off some potential deals after blocking multiple transactions including (i) Pfizer/Allergan, (ii) Halliburton/Baker Hughes and (iii) Staples/Office Depot. 

That being said, there are still a lot of deals going on, especially smaller deals and deals with businesses of a lower quality. Lower quality industries tend to need as much concentration as possible for economics of scale to come into play. If you have a product everyone wants and you can charge whatever you want, this is not a problem for you. If you own a newspaper publishing business, you want to scale as large as you can to try to offset the inevitable decline.

Newspaper Publishing

On that newspaper publishing note, Gannett (GCI, think USA Today) swallowed up Journal Media Group (JMG, think small papers in places like Milwaukee) this year and has now made two offers for Tribune Publishing (TPUB, think LA Times and Chicago Tribune). All of these businesses were spin-offs from broadcasters, Tegna (TGNA), EW Scripps (SSP) and Tribune (TRCO) respectively. This space should continue to consolidate. 

Oil & Gas 

Meanwhile, the predicted oil and gas M&A boom has not come to pass although a few deals, including one announced today, have come to pass. Why have the producers held off on deals? Most likely a few things:

  1. The bid/ask spread was likely too wide. In other words, the sellers wanted a lot more than the buyers were willing to pay. We saw this with Apache rejecting Anadarko's offer. That was the last big deal that has come public. 
  2. Everyone was shell-shocked and inertia came in
  3. A lot of the smaller companies were simply too far indebted for transactions to close and therefore bankruptcy was a better option to discharge the debt and pick up the assets later. 

Most likely the deals will pick up now that the oil and gas price has recovered somewhat.