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Dick Smith, Nine Entertainment coming back in growing IPO market

The rising stock market in the US and the slightly improving domestic economy are spawning more initial public offerings (IPO) for this financial year.

Two of the company names coming up for listing are familiar ones — Nine Entertainment and Dick Smith Electronics — making up part of the estimated $13 billion worth in estimated IPO market capitalisation.

Nine Entertainment was previously known as PBL Media, and was part of James Packer’s media business until his company Consolidate Media Holdings sold out its part ownership to the private equity company JVC Asia Pacific. In the IPO, the company is planning to sell up to $1.2 billion in new shares, which would end up giving the company an estimated $3 billion market capitalisation.

The company was doing so poorly that it was close to going into receivership until two other private equity firms stepped in, taking up 95% ownership, and leaving JVC Asia Pacific with only a 1% stake, effectively wiping out its $1.8 billion investment.

IPOs offer investors a way to get in at the ground floor on some new, growing company that hopefully has a lot of growth potential, yet it is hard to see from this perspective investors making a lot of money from a media company that has struggled to stay competitive with online media like other free-to-air TV channels like Seven West (ASX: SWM). Can Nine Entertainment become a successful turnaround?

Similarly, Dick Smith Electronics will be coming back to the market after being sold by Woolworths (ASX: WOW) to a private equity firm for $20 million in September 2012. The low price reflected the business risks and growth potential of an electronics business mostly dominated by JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN).

What could be done in a year to transform the business? The company has made a deal with David Jones (ASX: DJS) to operate the department store’s electronics business within the physical store and its online store. This will cut down on its store leasing costs, but now the question is whether customers will flock there or online when they want electronics.

How will new investors make money by buying into an IPO?  Only if the initial share price is really cheap and a decent dividend is paid. Share price growth is the big question, though. If the economy really picks up, then as a group the electronics stores will rise most likely. But will Dick Smith Electronics be the leader of the pack or just one of the “also ran”s?

Foolish takeaway

Private companies and their shareholders want to list on the stock market when consumer confidence is good, and rising indices indicate they will potentially raise more money when offering new shares in the float. For shareholders, unless they company is a really hot draw, it is commonly best to wait for it to list, see what the market thinks of it, and if it pulls back far enough, a bigger margin of safety may appear.

These two are definitely in the “wait and see” category. Then, after one or two business reports come out, you can see how the real progress is.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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