They say necessity is the mother of invention. Case in point, the novel IPO of Volume Services (AMEX:CVP). Last week, the company listed an Income Deposit Security (IDS) on the American Stock Exchange.
On the face of it, the new issue had a lackluster birthday. The stock closed up 23 cents from an initial price of $15. Never underestimate an investment banker. See, this particular issue was built for stability, and it may well be a lower-risk IPO alternative.
Volume Services provides concessions, catering, and merchandise services to sports facilities, convention centers, and entertainment facilities throughout the U.S. It is a "cash cow" business, which is what attracted its two main shareholders, Blackstone Group and GE Capital, a division of General Electric (NYSE:GE).
As a rule, private equity firms like these seek out predictable businesses that can be financed with debt. Often, the operations will be restructured and overall debt reduced. Next, it's the public's turn to get in on the action, usually by means of an IPO. Unfortunately, the new-issue market has been sporadic at best.
So, Blackstone and GE Capital got creative, borrowing a deal structure common in Canada. The result was the IDS. Here's how they pulled it off.
The Volume Services offering consisted of common stock and subordinated notes bearing a 13.5% coupon and due in 2013 (the principal is $5.70). After 90 days, the IDS holder can separate the common stock and the note. As for the common, it pays an 8.5% dividend (assuming a $9.30 stock price), which is extremely competitive, especially given lower dividend tax rates. The blended yield currently exceeds 10%.
Meanwhile, Volume Services does volumes of business. It is the second-largest provider to the NFL (10 teams) and third-largest provider for MLB (6 teams). The business is diversified across 128 facilities and the average client relationship dates back more than 15 years.
But no business is guaranteed. Clearly, Volume Services will shell out a big portion of its cash flows to investors. The concern is that the company may not have enough left over to reinvest and thus maintain its competitive edge against major rivals like ARAMARK (NYSE:RMK) and Sodexho USA (NYSE:SDX).
On the balance, however, the reception for the IDS offering has been positive. Don't be surprised to see others hitting the market next year.
Tom Taulli is a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at [email protected].
