IPO Watch: Liberty Lane acquisition

Ann C. Logue | May 20, 2008 6:20am EDT | Comment

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(Nasdaq:LLACU)
Scheduled for the week of May 19
$350 million estimated proceeds
$378.4 million estimated post-money valuation

If buying stock at an initial public offering is an act of faith, investing in special-purpose acquisition companies (SPACs) — startups with no operating assets (and no guarantee they will find any) — is an act of blind faith.

A SPAC is created with the sole purpose of acquiring an operating business with shareholders' money. Despite the fact that few SPACs have found anything to buy, new ones keep cropping up. Liberty Lane’s big selling point seems to be that it’s the first one that mighty Goldman Sachs is bringing to market, which may make it seem more legitimate in a sector once dominated by squirrelly shell companies traded in Vancouver.

Its founding officers, Paul Montrone and Paul Meister, had long tenures with Fisher Scientific, a manufacturer of scientific and industrial instruments now known as Thermo Fisher (NYSE:TMO). Montrone served as CEO from 1991 to 2006, and Meister was the company’s CFO from 1991 until 2001, when he was named vice-chairman of the board.

Fisher Scientific grew in part through 60 acquisitions, so the draw is that Montrone and Meister know to find acquisition candidates and structure good deals. Liberty Lane isn’t the only SPAC with experienced dealmakers at the helm, but not all have that distinction; several SPACs have executives who are more figureheads than deal-makers (Heckmann Corporation (NYSE:HEK) has on its board former Notre Dame football coach Lou Holtz and former U.S. Vice President Dan Quayle).

But no matter how good a track record Montrone and Meister have, they still have to find a good business to buy in the next two years, and that’s tough to predict. So many SPACs, private equity firms, and larger corporations are trying to do the same thing right now, and no type of buyer has a theoretical advantage over another when the issue is theoretical acquisitions. My guess is that 10 years from now, everyone will look back on Wall Street’s SPAC craze with a rueful smile, wondering why it seemed like a good idea to raise money in the public markets for a special, but not specific, purpose.

Upcoming IPOs:

MF Residential Investments (NYSE:MFR); scheduled for the week of May 19; $277.5 million post-money valuation: MF Residential is a real estate investment trust that will mostly invest in non-conforming mortgage-backed securities. These are loans that do not qualify for issuance through Ginnie Mae, Fannie Mae (NYSE:FNM), or Freddie Mac (NYSE:FRE), usually because of the size of the loan but also because of the credit quality or documentation. In other words, MF Residential is hoping to buy troubled mortgages cheap, and then be able to profit when the mortgage industry shakes out. Some day, it will be safe to make subprime loans again. But when?

Recently Priced:

Western Gas Partners L.P. (NYSE:WES); www.westerngas.com; priced May 8; $965.5 million post-money valuation: Western Gas is a limited partnership formed by Anadarko Petroleum (NYSE:APC) to operate natural gas pipelines in the middle of the United States. As long as natural gas demand stays high, revenues are likely to be strong. In addition, the company plans to make acquisitions, which could make sales even stronger. And, Western Gas has relatively little commodity price exposure because many of its services are offered on a fee basis, which protects it if oil prices fall. Distributions will be made at a rate of $0.30 per unit per quarter and $1.20 per year, almost all of its net income. In 2007, Western Gas Partners generated $62.5 million in net income on $116.1 million in revenue.

Real Goods Solar (Nasdaq:RSOL); www.realgoodssolar.com; priced May 7; $138.6 million post-money valuation; $113.9 million current market cap: Real Goods Solar sells all the equipment and supplies needed for solar power, whether its customers want a backup water heater or to move off the electrical grid entirely. It’s a partial spinout of Gaiam (Nasdaq:GAIA), a mail-order retailer of environmentally friendly goods that owns 61.1% of the post-offer company. And it’s profitable, with net income of $491,000 on $32.7 million in revenues, but the growth rate has been uneven. Still, with the prices of traditional energy sources going up while supplies are being drawn down, it might be a better long-term play than, say, Western Gas Partners or Whiting USA Trust. Now, how long is the long term?

Whiting USA Trust I (NYSE:WHX); www.whiting.com; priced Apr. 24; $266.2 million post-money valuation; $332.7 million current market cap: Whiting USA Trust is a limited partnership formed by Whiting Petroleum (NYSE:WLL) to hold several of its proved oil and gas wells in 172 fields located in 14 states in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States. Annual distributions are estimated to start at $5 per unit.