Carlyle IPO for Company With No Sales Leads This Week’s Offers

By Michael Tsang and Jim Polson

Dec. 14 (Bloomberg) -- Carlyle Group and Goldman Sachs Group Inc. are asking investors to pay $1.1 billion for an oil explorer with no sales in one of this week’s three U.S. initial public offerings for companies owned by private-equity firms.

Cobalt International Energy Inc., founded in 2005 and controlled by private-equity funds of Carlyle, Goldman Sachs and three other firms, plans to offer 63 million shares at $15 to $17 each, a Nov. 27 filing with the U.S. Securities and Exchange Commission showed. The IPO, scheduled for tomorrow, would give buyers a 19 percent stake in the Houston-based company, data compiled by Bloomberg show.

The offer by Cobalt, which has yet to produce any oil from its deepwater fields in the Gulf of Mexico and off the coasts of Angola and Gabon, comes after sellers used the 64 percent gain in the Standard & Poor’s 500 Index since March to raise more than $10 billion in the past three months. Cobalt’s IPO will show whether investors are willing to pay 61 percent more than the median U.S. oil explorer’s so-called tangible net assets for a company that doesn’t expect to generate any revenue from oil production for at least two more years.

"It’s a lottery ticket," said Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. "Private-equity firms feel this may be the opportunity and now is the time" to raise cash, he said.

Returning Money

The S&P 500 has advanced in every month since March excluding October, encouraging private-equity firms to count on IPOs to exit some of the more than $2 trillion in leveraged buyouts they made since the start of 2004 and return cash to investors. Distributions to their clients fell by two-thirds to $63 billion in 2008 from the previous year, according to London- based researcher Preqin Ltd.

Cobalt is one of four U.S. companies that may raise a total of as much as $1.87 billion in IPOs this week, data compiled by Bloomberg show. National Beef Inc., the Kansas City-based meatpacking company that accounts for 14 percent of the federally inspected steer and heifer slaughter, is the only company that’s not controlled by private-equity interests.

Team Health Holdings Inc., owned by Blackstone Group LP, the world’s biggest private-equity company, will sell shares tomorrow. Kraton Performance Polymers Inc., controlled by LBO firm TPG and the private-equity fund of JPMorgan Chase & Co., will follow a day later.

Gartmore Offering

Gartmore Group Ltd., the money manager controlled by San Francisco-based private-equity firm Hellman & Friedman LLC, last week sold shares for 33 percent less than the highest price it initially sought. London-based Gartmore raised 340 million pounds ($551 million) selling stock for 220 pence each after offering them for as much as 330 pence.

In the U.S. last week, Ellington Financial LLC, run by Michael Vranos’s hedge-fund firm, became the sixth company to shelve its offering since Oct. 29, as investors refused to finance the Old Greenwich, Connecticut-based company’s plan to buy bonds backed by the type of home loans that helped spur the biggest housing bust since the Great Depression.

Three of the previous five companies to postpone IPOs in the past six weeks were backed by private-equity funds.

Credit Suisse Group AG of Zurich and New York-based Goldman Sachs and JPMorgan will serve as the lead underwriters for Cobalt’s sale. The offering would exceed Oklahoma City-based SandRidge Energy Inc.’s $842 million IPO as the largest by a U.S. oil and gas exploration company this decade, data compiled by Bloomberg show.

Tangible Book Value

Cobalt estimates it will have a so-called tangible book value, a measure of shareholder equity that excludes assets that can’t be sold in liquidation, of $5.69 per share, after the offering and assuming an IPO price of $16, the filing shows.

At that price, the shares would be valued at 2.81 times, higher than the median of 1.74 times tangible net assets for 150 U.S.-listed oil and gas exploration companies, which include those that have fields with proven reserves, according to data compiled by Bloomberg.

The IPO also implies a so-called enterprise value, or the sum of its stock and debt minus cash, of 2.2 times Cobalt’s tangible book value, according to Francis Gaskins, president of IPODesktop.com in Marina del Rey, California.

That’s more expensive than the 1.9 times multiple that investors pay for Anadarko Petroleum Corp., the exploration company located in The Woodlands, Texas, that has reported five oil discoveries in deep waters of the Gulf of Mexico this year. Cobalt has stakes in two of those discoveries.

‘Lot of Risk’

Cobalt intends to use the proceeds from the IPO to fund drilling and exploration through 2011. The company expects to start producing oil and generating revenue from its Gulf of Mexico fields between 2012 and 2014, the filing showed.

"There’s a lot of risk no matter how you look at it," said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991.

How much investors will be willing to pay for a slice of Cobalt’s future earnings hinges on their confidence in Chief Executive Officer Joseph Bryant, according to Mark Gilman, New York-based oil and natural-gas analyst at The Benchmark Co.

Bryant joined Cobalt after a career that included running offshore operations in Angola for London-based BP Plc, Europe’s second-largest oil company. He also served as president of El Segundo, California-based Unocal Corp. before its acquisition by Chevron Corp., the second-biggest U.S. energy producer and located in San Ramon, California, in 2005.

Total Joint Venture

His credibility is bolstered by the company’s joint venture with Paris-based Total SA, Europe’s third-largest oil producer, which makes Cobalt a 60 percent owner and operator on deepwater Gulf of Mexico leases of both companies, according to Gilman.

"I’d be willing to pay more for exploration because the whole thing has Joe Bryant’s name on it," Gilman said. The joint venture means that Total is saying, "we believe in Joe Bryant,’" he said.

The private-equity companies that control Cobalt aren’t cashing out. Funds controlled by Carlyle, the Washington-based firm with $88 billion in assets under management, and New York- based Riverstone Holdings LLC own 27 percent of Cobalt, while Goldman Sachs and First Reserve Corp. of Greenwich, Connecticut, each have 27 percent stakes, the filing showed.

Blackstone, the private-equity firm run by Stephen Schwarzman, will sell shares of Team Health on the same day as Cobalt’s offering. New York-based Blackstone, which owns almost 90 percent of the Knoxville, Tennessee-based provider of staff and administrative services to hospitals and clinics, is seeking $14 to $16 apiece for 20 million shares of Team Health.

Blackstone, TPG

The sale would value Team Health at $897 million based on the midpoint price. Blackstone will receive about 47 percent of the money, cashing out 9.33 million shares. Team Health, which has $612 million in total debt, will use most of the remainder to repay some of its borrowings, a Dec. 2 filing showed.

TPG, the $45 billion LBO firm located in Fort Worth, Texas, and the private-equity fund of JPMorgan are seeking to raise $185 million for Kraton. The Houston-based company will sell 10.3 million shares at $16 to $18, its Dec. 2 filing showed.

Part of the money raised will be used to pay down some of $486 million in debt that Kraton had at the end of September.

The two funds are offering investors a 35 percent stake in Kraton, which would give the company a market capitalization of about $504 million at the midpoint IPO price of $17 a share, the filing showed. Both TPG and JPMorgan will retain stakes in the maker of polymers used in adhesives and lubricants.

The offerings come after private-equity backed AEI of George Town, Cayman Islands; Aviv REIT Inc. in Chicago and Alpharetta, Georgia-based HealthPort Inc. shelved IPOs in the past six weeks.

"People are taking a step back and looking closely as what is being offered," said 1st Source’s Cooper. "Investors don’t want to make too many waves right now."