Playing Devil's Advocate on the Talecris IPO: A Banker Provides the Contrarian View

Earlier this week, I argued that you’d have to be a fool to buy into the Talecris Biotherapeutics initial public offering, which involves modest net income, massive debt, high-paid executives, higher-paid investors and unrealistic proportions.

Well, I finally found a banker without a conflict of interest on the deal (no easy task, since there are seven banks on the book) to explain why the offering makes sense. I’ll refute each of my own arguments in turn…

1. Talecris is profitable…but not that much: I had argued that Talecris’ net income of just $65.8 million on revenues of $1.4 billion wasn’t that impressive. But Georgia Erbez, founder of boutique investment bank Beal Advisors, said net income will be less important once Talecris goes public than EBIDTA, and the company’s EBIDTA is a healthy $280 million.
2. Talecris has huge debts: True, to the tune of $1.1 billion, but half will be paid off after the IPO, leaving a debt-to-EBIDTA ratio of less than 2, which Erbez called “totally respectable.”
3. Talecris’ executives are bleeding cash out of the business: The CEO’s pay is high, but Erbez said those bonuses may be reined in once the company is public. And yes Cerberus Partners has stripped hundreds of millions of dollars out of the company through dividends — but that’s no different from a business owner taking home his profits. And it, too, will stop once Talecris is public.
4. Talecris will remain heavily indebted: All of the IPO profits will only pay off about half of Talecris’ debt, but as noted above, the debt-to-EBIDTA ratio isn’t that bad.
5. Talecris is aiming for an outrageously large IPO: Biotechs raise $85 million IPOs, not $850 million. But Talecris is not a biotech - its blood products portfolio is an operating business, Erbez said.

The bottom line, according to Erbez, is that while Talecris’ generous investor dividends and executive pay might have raised eyebrows in the past, you have to look at the company’s future. It’s a “nice operating business” even at a steady-state, and it’s projected to grow 20 percent per year, she said.