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CIT’s IPO Eagerly Awaited

NEW YORK — While it’s no surprise that the CIT Group desperately needs to complete its planned initial public offering, financial experts in the retail and apparel sector are hoping that the financial services firm would just hurry up and...

NEW YORK — While it’s no surprise that the CIT Group desperately needs to complete its planned initial public offering, financial experts in the retail and apparel sector are hoping that the financial services firm would just hurry up and get it done, already.

They might get their wish this week as the pricing on the offering could happen as early as today.

To be sure, it is not CIT proper that the folks are concerned about, but rather the need for CIT to quickly dissociate itself from the problems of parent Tyco International.

While CIT is a global commercial finance firm in operation since 1908, it is also understood to be the biggest player in the area of factoring, an often-used source of capital for the fashion industry. The company went public in 1997 and was acquired by Tyco in a $9.5 billion cash-and-stock deal in July 2001.

The overall factoring business is a $50 billion to $60 billion industry, financial experts said. They estimate that CIT controls at least 30 percent of the market. Executives at CIT declined to be interviewed, citing the requisite blackout period pending completion of the IPO. Other big factors include GE Capital Corp., HSBC Business Credit and GMAC Commercial Credit.

As reported, John Fort is the former Tyco executive who’s now leading the parent company following the resignation of chief executive officer Dennis Kozlowski. Early last month, Kozlowski was indicted by the Manhattan district attorney’s office for scheming to avoid $1 million in sales tax concerning artwork that he purchased. Last Wednesday, prosecutors expanded their probe to include charges of evidence tampering in the case. The criminal probe, according to sources, also has widened to include an investigation of whether other Tyco executives used corporate funds to buy artwork and homes.

Tyco’s business dealings and concerns over balance-sheet issues have been under the microscope of many since the beginning of the year, just one result of the closer scrutiny on accounting and financial transparencies following the collapse of Enron. As part of its restructuring, Tyco planned to spin off CIT in February, but management changed its mind and said it was looking to sell the unit instead.

However, Tyco failed to find a buyer, even at what sources described as fire-sale prices. A deal to sell CIT to investment bank Lehman Bros. fell through, and the hoped-for IPO isn’t expected to fetch much more than $5 billion, a slight premium over the price range that Lehman was willing to pay.

Carol Lapidus, an accountant and managing director in the textiles and apparel section of American Express Tax and Business Services Inc., observed: “There is much uncertainty about CIT right now, and a number of firms are concerned because so many in our industry are financed by them. The completion of the IPO will make the companies financed by CIT more secure. CIT is a strong and careful lender. However, because it has to separate itself from its parent, the sooner something gets done, the higher the comfort level will be for CIT’s customers.”

Bob Carbonell, director of credit for the Sands division of CyberBusiness Credit, a credit reporting firm, noted: “My experience is that any company that is run directly by its own management tends to be more of a well-run firm than those that are overseen by a parent.”

Diversified conglomerates such as Tyco have tended to be the exception on the commercial landscape in recent years anyway, as companies have been inclined to shed “noncore assets” that fall outside of their strongest sources of revenue and profit.

The current plans call for 200 million shares to be floated, with pricing to be between $25 and $29 per share. Goldman Sachs is the lead underwriter. Other underwriters include heavy-hitting firms such as Lehman Bros., J.P. Morgan, Banc of America Securities, Credit Suisse First Boston and Salomon Smith Barney. Also involved are Merrill Lynch & Co.; Bear, Stearns & Co Inc.; CIBC World Markets; Deutsche Bank Securities; UBS Warburg, and Wachovia Securities.

The IPO was supposed to have occurred by the end of June, but was pushed into this month. The delay stems from Tyco’s negotiations with the Securities and Exchange Commission to bring goodwill accounting for CIT in line with the requisite standard. Tyco is expected to announce a $6 billion charge in the next few months in connection with the asset write-down of CIT after the IPO is effected.

Last month, Moody’s Investors Service, a ratings agency, affirmed CIT’s debt rating at “A2,” with Tyco’s downgraded to “Baa3,” one notch above speculative or junk status. Tyco remained under review for possible downgrade.

Moody’s debt analyst George Meyers said in a statement at the time that the sale of CIT is vital to Tyco because of the cash proceeds expected, which will be used to pay down debt. In the case of CIT, he wrote that if the separation from its parent should take longer than expected, it “is likely that CIT’s long- and short-term ratings would be adjusted downward.” The underlying franchise of CIT remains sound, even though the firm needs to “tap alternate sources of liquidity and control its growth” and employee distractions due to Tyco’s high-profile difficulties.

Many observers, unsure of what will happen next with Tyco, are hoping the IPO goes to market soon so CIT can effect a complete separation, just in case its parent needs to consider a bankruptcy filing.

John Olert, an analyst at Fitch Ratings, said: “At this point, we continue to evaluate CIT. The rating watch is evolving, driven by CIT’s linkage to its parent.” With all the necessary paperwork filed with the SEC, Olert expected the IPO to occur soon. “If something material were to happen to Tyco, there could be additional pressure on CIT. It is not our understanding that anything is about to happen or that there is anything imminent.”

Of course, this economic environment is not the ideal time in which to go public. European fashion firms Burberry and Prada are putting IPOs in place, although they’ve delayed offerings in the past. Prada’s third delay was announced just last Wednesday.

Yet, there have also been some successes. Polo Ralph Lauren successfully tapped into the public market with its recent secondary offering. Aeropostale just concluded its IPO. However, whether CIT can get investors whipped up into a buying frenzy for its shares remains to be seen.

Peter Solomon, who heads an investment firm bearing his name, bluntly stated: “The market stinks. This market is very difficult for IPOs. For a company to be successful, it has to have a very good story. Companies that will do well are those with defined strategies that people understand. Another issue of concern to investors these days is transparency. They want to have confidence in the management.”

Solomon noted that one reason retail IPOs, such as the recent Aeropostale issue, have done well is because company earnings are “transparent.” Sales volume, total square footage and other information are accessible and understandable, he said. While the investment banker is not familiar with CIT’s filings with the SEC, he noted that financial companies in general tend to be the “most obscurable.” According to Solomon, very few people have a clear understanding of the balance sheet because many don’t delve enough into the business portfolio with a fine-tooth comb to really learn about the individual operations and their related financial risks.

Still, CIT is a “very significant company,” according to Solomon, who expects investors such as mutual funds and other institutional holders to, more than likely, be interested in its shares.

One financial source said that an independent CIT will allow the firm to exercise its own judgment as to which firms to lend to and how much to lend them. The analyst said that Tyco, in the past, had exerted pressure on CIT to limit its exposure on certain credit lines because of the corporate parent’s overall exposure. A credit analyst from another firm said that CIT was told in December to cut its line when a large retailer ran into trouble. Both analysts said that CIT was one of the first among factors to cut credit lines when Kmart appeared to be struggling following holiday 2001.

Gary Wassner, president of Hilldun Corp., a factor, said: “The perception in the marketplace is that CIT was the powerhouse for a while, dominating and beating every other firm for the business. Now, people are nervous about CIT because of its ties with Tyco. CIT needs to do something to separate itself from Tyco in the event there is a major disaster concerning its parent, such as a bankruptcy. It has a good shot at building back its business if it can effect a successful IPO, but I’m concerned that not enough people in the general public really understand what it is that a factor does.”

Emanuel Weintraub, an apparel industry consultant, noted: “The IPO will be great for CIT because it needs to be unshackled by Tyco. The underwriters are part of the platinum crowd and wouldn’t touch anything with a taint on it because they themselves are under the microscope. CIT has a strong management team that is very well regarded by both the consumer markets and within the apparel industry for its factoring services. I suspect that the stock will do well if reasonably priced because my clients tell me that they think CIT is still a very strong brand.”

bank Lehman Bros. fell through, and the hoped-for IPO isn’t expected to fetch much more than $5 billion, a slight premium over the price range that Lehman was willing to pay.

Carol Lapidus, an accountant and managing director in the textiles and apparel section of American Express Tax and Business Services Inc., observed: “There is much uncertainty about CIT right now, and a number of firms are concerned because so many in our industry are financed by them. The completion of the IPO will make the companies financed by CIT more secure. CIT is a strong and careful lender. However, because it has to separate itself from its parent, the sooner something gets done, the higher the comfort level will be for CIT’s customers.”

Bob Carbonell, director of credit for the Sands division of CyberBusiness Credit, a credit reporting firm, noted: “My experience is that any company that is run directly by its own management tends to be more of a well-run firm than those that are overseen by a parent.”

Diversified conglomerates such as Tyco have tended to be the exception on the commercial landscape in recent years anyway, as companies have been inclined to shed “noncore assets” that fall outside of their strongest sources of revenue and profit.

The current plans call for 200 million shares to be floated, with pricing to be between $25 and $29 per share. Goldman Sachs is the lead underwriter. Other underwriters include heavy-hitting firms such as Lehman Bros., J.P. Morgan, Banc of America Securities, Credit Suisse First Boston and Salomon Smith Barney. Also involved are Merrill Lynch & Co.; Bear, Stearns & Co Inc.; CIBC World Markets; Deutsche Bank Securities; UBS Warburg, and Wachovia Securities.

The IPO was supposed to have occurred by the end of June, but was pushed into this month. The delay stems from Tyco’s negotiations with the Securities and Exchange Commission to bring goodwill accounting for CIT in line with the requisite standard. Tyco is expected to announce a $6 billion charge in the next few months in connection with the asset write-down of CIT after the IPO is effected.

Last month, Moody’s Investors Service, a ratings agency, affirmed CIT’s debt rating at “A2,” with Tyco’s downgraded to “Baa3,” one notch above speculative or junk status. Tyco remained under review for possible downgrade.

Moody’s debt analyst George Meyers said in a statement at the time that the sale of CIT is vital to Tyco because of the cash proceeds expected, which will be used to pay down debt. In the case of CIT, he wrote that if the separation from its parent should take longer than expected, it “is likely that CIT’s long- and short-term ratings would be adjusted downward.” The underlying franchise of CIT remains sound, even though the firm needs to “tap alternate sources of liquidity and control its growth” and employee distractions due to Tyco’s high-profile difficulties.

Many observers, unsure of what will happen next with Tyco, are hoping the IPO goes to market soon so CIT can effect a complete separation, just in case its parent needs to consider a bankruptcy filing.

John Olert, an analyst at Fitch Ratings, said: “At this point, we continue to evaluate CIT. The rating watch is evolving, driven by CIT’s linkage to its parent.” With all the necessary paperwork filed with the SEC, Olert expected the IPO to occur soon. “If something material were to happen to Tyco, there could be additional pressure on CIT. It is not our understanding that anything is about to happen or that there is anything imminent.”

Of course, this economic environment is not the ideal time in which to go public. Burberry is putting an IPO in place, but Prada’s third IPO delay was announced just last Wednesday.

Yet, there have also been some successes. Polo Ralph Lauren successfully tapped into the public market with its recent secondary offering. Aeropostale just concluded its IPO. However, whether CIT can get investors whipped up into a buying frenzy for its shares remains to be seen.

Peter Solomon, who heads an investment firm bearing his name, bluntly stated: “The market stinks. This market is very difficult for IPOs. For a company to be successful, it has to have a very good story. Companies that will do well are those with defined strategies that people understand. Another issue of concern to investors these days is transparency. They want to have confidence in the management.”

Solomon noted that one reason retail IPOs, such as the recent Aeropostale issue, have done well is because company earnings are “transparent.” Sales volume, total square footage and other information are accessible and understandable, he said. While the investment banker is not familiar with CIT’s filings with the SEC, he noted that financial companies in general tend to be the “most obscurable.” According to Solomon, very few people have a clear understanding of the balance sheet because many don’t delve enough into the business portfolio with a fine-tooth comb to really learn about the individual operations and their related financial risks.

Still, CIT is a “very significant company,” according to Solomon, who expects investors such as mutual funds and other institutional holders to, more than likely, be interested in its shares.

One financial source said that an independent CIT will allow the firm to exercise its own judgment as to which firms to lend to and how much to lend them. The analyst said that Tyco, in the past, had exerted pressure on CIT to limit its exposure on certain credit lines because of the corporate parent’s overall exposure. A credit analyst from another firm said that CIT was told in December to cut its line when a large retailer ran into trouble. Both analysts said that CIT was one of the first among factors to cut credit lines when Kmart appeared to be struggling following holiday 2001.

Gary Wassner, president of Hilldun Corp., a factor, said: “The perception in the marketplace is that CIT was the powerhouse for a while, dominating and beating every other firm for the business. Now, people are nervous about CIT because of its ties with Tyco. CIT needs to do something to separate itself from Tyco in the event there is a major disaster concerning its parent, such as a bankruptcy.”

Emanuel Weintraub, an apparel industry consultant, noted: “The IPO will be great for CIT because it needs to be unshackled by Tyco. The underwriters are part of the platinum crowd and wouldn’t touch anything with a taint on it because they themselves are under the microscope. CIT has a strong management team that is well regarded by both the consumer markets and within the apparel industry. I suspect that the stock will do well if reasonably priced because my clients tell me that they think CIT is still a strong brand.”