CNBC star Jim Cramer may not have liked the valuation of the LPL Investment Holdings IPO, but investors sure did. The happiest people? LPL shareholders who sold off some of their stake in the company, the biggest independent broker/dealer in the country.
Private equity investors and top managers at LPL Financial’s parent company were well-rewarded with today’s initial public offering of 15.6 million shares of stock on the Nasdaq Global Select Market. The offering raised about $470 million with the stock opening at $30 a share, at the top of the $27-$30 range set in the offering. (LPLA closed at $32.15, but reached reaching a mid-day high of $33.84.)
The parent company, LPL Investment Holdings, realized no cash from the sale; the shares that were sold belonged to two PE firms that took stakes in LPL five years ago, Hellman & Friedman and TPG Partners. Each will retain about 32 percent of the company following the sale, according to the registration document filed with the SEC.
Which is why Cramer didn’t like it. LPL has $1.4 billion in debt, received no proceeds from the IPO and was, in his estimation, a private equity deal that was overpriced.
Also selling shares was LPL Chairman and Chief Executive Mark Casady, who would retain about 1.7 percent ownership of the company following the sale, the registration said. An LPL spokesman declined to comment on details of the transactions. In its registration, LPL said it could realize $35.4 million if the offering’s underwriters exercised their option to purchase additional shares, money the company planned to use toward paying down its debt, which could be a real burden on the company, industry experts said.
“There was some talk that General Motors’ IPO was going to suck all the oxygen out of the room. Apparently not,” said Tom Taulli, a Los Angeles-based independent IPO analyst. Today’s offering “is a good one-day performance. If you’re an investor and you got a piece of that allocation, I think you’re probably happy today.”
LPL Investments, with headquarters in Boston and San Diego, reported $59.7 million in profit on $2.29 billion in revenue for the first three quarters of the year, compared to profit of $28.9 million on revenue of $2 billion for the comparable period a year earlier. The b/d has seen sharp growth in recent years, acquiring a slew of advisory firms and more than doubling the number of advisors since 2005 to more than 12,000 today. But some aspects of that growth had some analysts questioning whether the IPO was overvalued. The year-to-date net profit margin is about 2.6 percent, and a $30 share price provides a multiple of 38 times annualized year-to-date earnings.
Debt service is a drag on profits, Taulli said, but he also sees more growth ahead for the company. “Over time as they get more cash flow, they’re going to pay down that debt. The cost of capital in today’s market is affordable. And this is a company that’s going out and buying other companies,” Taulli said. “While they are taking on debt, the cash flow returns are much higher. I think they’re making the right decisions, but it might mean in the shorter run maybe lower earnings.” One concern he has: will cost controls affect the service quality?
“Twelve thousand independent financial advisors — there aren’t a lot of firms of that size that are healthy and profitable and that have avoided the big meltdown. It’s not a bad-looking company,” said Ben Holmes, publisher of Morningnotes.com, a provider of IPO analysis. “It’s got some size to it, some heft.”
One New York metro region LPL advisor said the public offering could boost the profile of the company among investors. “People don’t know who LPL is, so I think it could be good for us,” the advisor said. “The relationship is with the advisor, not the company, and yet people do want to know what the company is about.
“They operate a tight ship, and they keep bringing in more and more advisors and more and more money,” she added. “They are a great company and have great financials…They really support their advisors.”
