Hoyts’ IPO delay highlights industry anxiety

PEP's news comes almost a year to the day that it first decided to delay Hoyts IPO, which was initially slated for the second half of last year. The company said in March 2010 that it instead aimed for a 2011 exit, and today has neglected to identify a new target date.

Hoyts Executive Chairman David Kirk confirmed to media that PEP has no timetable for an exit, saying, "The decision was taken this was not the optimal time to exit the business. It is still quite uncertain." Hoyts was initially slated to raise up to A$1 billion in its listing process, and PEP had gone so far as to call a pitch for banks to manage the IPO, with Goldman Sachs JBWere, UBS and Commonwealth Bank reportedly selected.

Market cycles, not PE to blame

When market insiders reflect on Australia's recent IPO market, the same examples spring to mind. Department store Myer Holdings, exited by TPG, and outdoor sporting goods store Kathmandu Holdings, which was owned by Quadrant Private Equity and Goldman Sachs JB Were, have performed sluggishly on the public market since they made their debuts in late 2009. 2010 was meant to be a revival, but continuing volatility not only spooked the likes of Hoyts, but also CHAMP-backed Study Group - whose IPO was valued at A$600 million - and PEP-backed bookstore chain REDGroup, which is now in receivership.

Hoyts CEO Kirk noted in discussion around REDGroup, "Things can go wrong" with a business that are outside of private equity control, pointing to the "viciously cyclical nature" of advertising and media as the culprit behind the company's problems. "It is not about the private equity model," he emphasized.

Tim Martin, Partner and Director at Crescent Capital Partners, told AVCJ, "For the past two or three years everyone has been hearing about PE deals queuing up for an IPO exit - clearly at best not all will get away when they want to. I suspect that there are some PE-backed businesses out there with no obvious trade buyers that may be reliant on IPO as the only viable route," beyond a secondary to another firm.

"The importance of GPs thinking clearly about multiple exit options at time of investment is obvious, otherwise GPs can become ‘stuck' with assets and captive to market cycles, particularly if they are not IPO ready and can seize the moment when an IPO window opens."

In terms of Hoyts, the elements surrounding the company are promising: PEP originally bought Hoyts in 2007 from PBL Media and Western Australian Newspapers, with an enterprise valuation of approximately A$440 million ($397 million). The company is reportedly the second-largest cinema operator in the country, with 23% market share. With these credentials, analysts suggest that holding off on an IPO until the most revenue can be generated is wise, whenever that may be. And the company has continued to strengthen its position in the market. In October, Hoyts acquired rival group AMC for an undisclosed price, coming only two months after PEP announced the postponement of Hoyts' IPO. That transaction expanded Hoyts' presence in Queensland and New South Wales, as AMC operates five cinemas mainly in the region, and boosts Hoyts' overall value in preparation for PEP's future exit.

Available Exit Routes

At the 8th Annual Australia & New Zealand AVCJ Private Equity and Venture Forum, discussion regarding IPO exits was noticeably absent, though trade sales and even secondaries were seen a much better options.

According to AVCJ Research data, at least 34 private equity firms exited their Australian-based investees via trade sales in 2010, with Affinity Equity Partners' $574 million exit from Loscam Ltd. to the China Merchants Group, and Iron Bridge Capital's $566 million sale of Easternwell Group to domestic industrial firm Transfield Services Ltd. among the top deals.

Martin also notes that, for Crescent, "the trade exit route is really the guiding light with six of our last seven exits," noting that the firm's September sale of National Hearing Care to Amplifon exemplifies this strategy, as Crescent initially considered an IPO but found that robust interest from industry and private equity players meant a sale was more rewarding.

On a conference panel about LP expectations in Australia over the next investment cycle, Clive Boyce, Investment Manager for South Australian government-owned Funds SA, additionally indicated that secondary sales from fund to fund have historically been seen as a less desirable exit mechanism, yet he pointed out that funds are often in a position to gain as different PE firms have different skills, and such a transaction could end up being positive for companies and their management.

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• Topics
• Exits
• Australasia
• Secondaries
• Pacific Equity Partners