Life sciences company Avantor Inc. is preparing to move forward with a major IPO. The company’s S-1 statement uses a placeholder value of $100 million, but Renaissance Capital reports that Avantor could “raise up to an estimated $1.5 billion in an initial public offering.” The company is underwritten by Goldman Sachs (NYSE:GS) and JPMorgan Chase & Co (NYSE:JPM), and we do not know its planned valuation.
Avantor looks like a great company at first glance, with healthy financial numbers and a market with high potential. But the devil is in the details, and there are major concerns with this company relating to its debt and current ownership. Avantor could be a decent investment with the right valuation, but here are some reasons to be less than enthusiastic about this IPO.
What does Avantor do?
Avantor says that it is a “leading global provider of mission-critical products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries,” and its wide variety of products is impressive. Avantor helps other organizations develop chemicals and other products, whether it is by providing services, materials and consumables, and equipment and instruction.
Avantor’s business appears sound, and the business is both not overly dependent on any one product and has plenty of room to expand. Avantor points out China, Southeast Asia, and Eastern Europe as a geographic avenue of expansion, and research and development spending will continue to rise in the life sciences industry.
A final point to note before discussing Avantor’s finances is that in 2010, the company was acquired by private equity firm New Mountain Capital. Since then, Avantor has expanded through acquisitions. Avantor acquired silicone product producer NuSil in 2016 and then acquired laboratory products supplier VWR in 2017 for $6.4 billion.
Avantor’s Financial Numbers and New Mountain Issues
As a result of these acquisitions, it can be difficult to track some of Avantor’s financial metrics. For example, Avantor’s net sales rose from $517 million in the nine months ending September 30, 2017, to $4.4 billion in the same time period in 2018. Most of this increase obviously came from the VWR acquisition as opposed to natural growth, though Avantor still reports a combined growth of $407 million between VWR and Avantor as they merged together.
As noted above, Avantor’s financial markets numbers look good at first glance. The company is growing, though profitability numbers have shrunk from past profits to a net loss of $33.6 million in the first nine months of 2018. Cash flows from operations have swung to the positive, and it appears that the VWR merger has improved the company’s fortunes.
But the downside is that Avantor’s balance sheet is a mess. At first glance, things look alright as Avantor reports that as of December 31, 2017, it had $10 billion in total assets balanced against $9.4 billion in total liabilities of which $7 billion was financial debt. The problem is that about $7.2 billion of the total assets are either in the categories “Goodwill” or “Customer relationships.” These intangible assets can be difficult to value, and a lower estimate would harm confidence in Avantor.
In addition to this problematic balance sheet, the bigger problem is what Avantor intends to do with the raised fund proceedings. When Avantor acquired VWR, it issued Existing Senior Preferred Stock to VWR shareholders and plans to use the net IPO funds to buy the stock back. New Mountain likely owns much of this stock.
This means that shareholder will be giving their money not to general corporate purposes nor even to help Avantor deal with its debt problem, but to help enrich a wholly different company. This speaks poorly for New Mountain, and by extension calls into question whether they will do what is best for shareholders.
There is the positive news that Avantor will not be going with the practice of holding two classes of stock which would let New Mountain and Avantor leadership keep all the voting rights despite raising huge amounts of funds. But the fundamental matter is that Avantor is hindered by New Mountain, and faces financial problems such as high debt and questionable assets.
A Cautious Examination
Avantor is far from the worst IPO of 2019, and investors can make a case for why this company could be a buy with its growing market and solid business. But an important question with IPOs is to ask why the company is choosing this particular moment to go public. In Avantor’s case, it seems like they are expecting new shareholders to pay off New Mountain and VWR shareholders in exchange for Avantor stock.
Investors will have to wait and see, and perhaps this company could be a good deal if the valuation is lower than expected. But for now, the prudent approach will probably be to look elsewhere.