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As Rest of IPO Market Stalls, Corporate Carve-Outs Gain Steam -- WSJ

The Wall Street Journal · 01/06/2023 05:30

By Corrie Driebusch

The U.S. initial public offering market's acute slowdown is creating space for deals commonly known on Wall Street as corporate carve-outs.

Traditional initial public offerings in the U.S. last year raised the smallest amount in at least two decades, according to Dealogic. Three of the biggest deals of the year were carve-outs -- companies spun out from parents, using a standard IPO sale rather than the stock distribution that often occurs in what is known as a spinoff.

That trend appears to be continuing in 2023. Kenvue Inc., the consumer health business unit of Johnson & Johnson, recently filed regulatory paperwork for its planned initial public offering. The IPO is being led by Goldman Sachs Group Inc. and JPMorgan Chase & Co. The regulatory filing didn't reveal the target valuation for Kenvue, but a person close to the offering said the offering might raise $5 billion or more.

More companies are considering these divestitures right now given the state of the markets, which have all but closed for many securities viewed as holding more risk, and fears that a recession might be looming. Investors view these carve-outs as more attractive than many of the IPOs that came to market in recent years, reflecting their status as mature businesses with solid profits.

"In times when there's a potential downturn, companies will look at their portfolio to decide what their core assets are," said David Oberst, a partner focusing on M&A transactions at Deloitte & Touche. He said some other large companies are considering carve-outs.

Some standard spinoffs continue to hit the market as well. General Electric Co.'s medical- equipment business recently started trading on the Nasdaq Stock Market under the name GE HealthCare Technologies Inc. Under that deal, GE distributed one share of GE HealthCare common stock for every three shares of GE common stock its investors held.

IPOs in the U.S., excluding offerings by special-purpose acquisition companies, raised $8.6 billion in 2022, far below the roughly $56 billion annual average over the past decade, according to Dealogic. Roughly 40% of that total came from three entities that fit the carve-out model: Mobileye Global Inc., Corebridge Financial Inc. and Bausch + Lomb Corp.

Many companies in the IPO pipeline suspended their offerings last year because rising interest rates crunched valuations. Big corporations are less likely to delay a spinoff for those reasons, given that there is no need to actually sell shares. If they do a carve-out and do sell new stock, they can only sell a small portion of the business initially.

Intel Corp. spun off its self-driving car unit, Mobileye, in a splashy October debut. Intel priced shares of Mobileye conservatively given the perils facing the IPO market, and that bet has so far paid off. Mobileye's shares recently traded at roughly $30 each, above its $21 IPO price.

Not all fared strongly: Two of those three carve-outs last year are trading below their listing price.

Corebridge Financial, the life-insurance and asset-management unit of American International Group Inc., priced its September IPO at the low end of expectations. Its stock has bounced around since its debut, recently trading at around $20, compared with the $21 offer price.

In May, Bausch Health Cos. sold shares of Bausch + Lomb at $18 apiece, below expectations. Bausch + Lomb recently traded at around $16 a share.

Write to Corrie Driebusch at corrie.driebusch@dowjones.com

(END) Dow Jones Newswires

January 06, 2023 05:30 ET (10:30 GMT)

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