Two L.A. Firms Prepare to Wade Into Tepid IPO Waters

Staff Reporter

With the market for initial public offerings showing signs of reawakening after a three-year snooze, two large Los Angeles companies will be among the first to test its wherewithal.

Downtown L.A. real estate developer Maguire Properties Inc. and health insurer Molina Healthcare Inc. both delayed IPOs earlier in the year. Last week, they were conducting road shows for prospective investors and both have set plans to go public the week of June 23, although the Maguire issue could take place as late as the 30th.

Developer Robert Maguire, whose portfolio is estimated to be worth $2 billion, revised the prospectus for his planned $890 million IPO in April. At the time of the initial launch target in January, the IPO market was essentially closed, even though real estate investment trust shares had been doing fairly well.

One adjustment made by Maguire was to refocus his portfolio on L.A. properties. The initial dividend yield of 8 percent on the issue has also been set higher than similar downtown office REITS, in part because the post-IPO debt level would run more than $1 billion.

"There is some risk and Maguire needs to get the deal done so the Street is taking advantage of the need," said Craig Silvers, president of Bricks & Mortar Capital, a Los Angeles money manager that specializes in REITs.

Maguire's success also depends on the resilience of the downtown Los Angeles office market, where the four largest properties in the portfolio are located: U.S. Bank Tower, Gas Company Tower, Wells Fargo Tower and KPMG Tower. All are in the Bunker Hill section of downtown and represent roughly 85.4 percent of the portfolio's annualized rent as of March, according to the firm's prospectus.

But with REIT shares up 16 percent this year, investors expect the offering large for an IPO but not mammoth to be received well.

About 28 companies are lined up to come public, including Maguire Properties and Molina Healthcare, the Long Beach-based HMO with more than 500,000 members on Medicaid.

Molina had been in limbo primarily because market conditions have dampened enthusiasm for health care stocks. The company is looking to raise $102 million.

Tim Sullivan, managing director at Madison Dearborn Partners, Inc., a private equity firm in Chicago, said a key issue for Molina Healthcare is whether states will cut Medicaid rolls.

"The negative is that states are looking for cuts and in California in particular, that can affect the growth of their business," he said.

So far this year, just eight companies have come public, compared with 107 new issues last year and a high of 871 offerings in 1996. The first quarter of 2003 was the slowest period since the first quarter of 1978, with just five new offerings apiece.

"It's probably going to be the worst year for IPOs in 30 years, there's no way to sugarcoat it," said Richard Peterson, chief market strategist at Thomson Financial, who doesn't expect a complete turnaround until 2005.

Yet with a rally underway in the overall stock market, an improved IPO market would be a sign to investors that the economy has re-entered a growth mode.

"There was a lot of junk being pushed out in the last cycle when investors really got burned," said Mark Forney, a portfolio manager at Ryan Capital in Santa Monica, which has $46 million under management. "To get that whole IPO mechanism cranked up again you have to present people with quality."

Last week, FormFactor Inc., of Livermore became the first company to go public since the New York Stock Exchange and the National Association of Securities Dealers released new recommendations last month on the IPO process.

FormFactor, a maker of semiconductor testing equipment, is profitable and has the backing of Intel Corp., which owns a 6.4 percent stake.

Also eyeing a run at the public market is Mountain View-based Google Inc., the search engine that has gained market share while building ancillary revenue-producing services. A successful Google IPO would be a strong signal that the public markets are open for business.

Kathy Smith, an analyst at Renaissance Capital, which does independent research on newly public companies, said share prices for new IPOs are up 25 percent so far this year.

Nevertheless, it will take more to convince companies such as Los Angeles-based engineering and design firm Aecom Technology Corp. to retest the public waters.

Aecom, with revenues of $1.7 billion last year, originally filed to sell shares in February 2002, but finally abandoned its plans in April and withdrew the offering prospectus.

Increased scrutiny from the SEC has stretched the time it takes to come public to upwards of a year, said Glenn Robson, Aecom's chief financial officer. "This process takes a while and the market just wasn't there," he said.

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