AWK - American Water Works plans on offering 64 million shares (75.6 million if over-allotment is exercised) at a range of $24-$26. **Note** - All shares in this deal are being sold by insiders. AWK will receive no monies from this ipo. Fact is AWK is heavily leveraged and they most certainly could use ipo monies to pay off debt. However that is not going to occur.
Goldman Sachs, Citi, and Merrill Lynch are lead managing the deal. Co-managing will be nearly every firm on the street other than Bear Stearns. There are thirteen co-managing firms in all.
Post-ipo AWK will have 160 million shares outstanding for a market cap of $4 billion on a pricing of $25.
RWE will own essentially all non-floated AWK shares post ipo, an approximate 60% stake in AWK post-ipo. RWE is the selling shareholder in this deal, selling all 64 million shares, 75.6 million if over-allotment is exercised. RWE, a German operation, is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. RWE purchased the then public American Water Works in early 2003 for $4.6 billion in cash.
This is a classic spin-off ipo as RWE plans on divesting themselves of their 60% stake in AWK as soon as possible (meaning right around that 180 day mark). Expect heavy future overhang here as RWE Aqua will be divesting approximately 90 million more shares of AWK sometime in late 2008.
Note - American Water Works has always toted around substantial debt. As a utility, in this case a water utility, it is common to see substantial debt as cash flows from this type of operation tend to be fairly predictable and not effected by economic cycles. When RWE purchased American Water Works five years ago, AWK had approximately $3.3 billion in debt. The public AWK in 2008 will have $5 billion in debt. It appears that a portion of the increased debt over the past five years has been due to RWE laying debt onto the back of AWK in order to fund payouts to RWE. If we look at the increased debt levels, RWE purchased American Water Works in for a total cash and debt-load interest of $7.9 billion. Assuming a pricing of $25, AWK post-ipo will have a total market cap plus debt consideration value of $9 billion.
Personally, I don't care what business one is in I'm always uncomfortable with a debt to capitalization level in AWK's post-ipo ballpark. $5 billion in debt and an expected initial market cap of $4 billion is a highly leveraged operation. So before we even look at the company, this deal has two serious strikes against it: 1) heavily leveraged with at least a portion of the leverage coming due to cash-out to parent company; 2) future overhang of approximately 90 million shares as RWE plans to completely spin-off their entire ownership of AWK by the end of 2008. I would expect these shares to come in the form of a hefty secondary as RWE is traded in Germany making a tax free dividend of AWK shares to RWE shareholders unlikely.
All things being equal the above is enough for me to pass on this ipo right here.
