CurrentOfferings.com Story:

The Next Big Thing in IPOs

By Tom Taulli, Current Offerings, June 7, 2004

After several years of near depression, the market for initial public offerings (IPOs) is starting to make a comeback � albeit, a tepid comeback.

However, Wall Street always seems to find a way to innovate new structures for changing markets. And this has happened yet again, with something called an income deposit security or IDS.

Interestingly enough, this is not a home-grown US innovation. In fact, it has been a mainstay of Canadian public markets (known there as Income Trusts).

The first IDS to hit the US markets came in late 2003 with the offering of Volume Services (AMEX: CVP). The company is a leader in catering an concessions for sports and entertainment facilities.

The private equity fund, Blackstone Group, and GE purchase Volume Services because of the strong cash flows.

So, what�s the problem? Well, Volume Services is a mature business and really does not have the excitement of a typical IPO.

That�s where the IDS structure comes in. Basically, it is a hybrid security, which is part equity and part debt. The equity is simply common stock with a hefty dividend. As for the debt, it is a subordinated note with an annual interest payment and repayment of principal in the future.

This can be quite attractive for conservative investors. Dividends are now taxed at a lower rate. The combination of equity and debt should lead to a higher blended rate � with a high degree of security in the investment.

The structure is also attractive to private equity firms. They certainly want to get liquidity for their investments and this appears to be an effective way to do just that.

In light of the advantages, there has been a rush to do deals, such as Eye Care Centers of America, Coinmach, and B&G; Foods.

Interestingly enough, as IDSs become more popular, a new trend might emerge. That is, a company may forgo the funding from a private equity firm and go straight to an IDS offering. Ironically, private equity firms may be creating their own competition.

Tom Taulli, the co-founder of Current Offerings, is a manager of the Oceanus Value Fund and the author of EDGAR-Online Guide to Financial Statements.