Michaels IPO tests investor appetite for retail

After a chilly winter and spring for the retail sector, are investors primed for the initial public offering of hobby company Michaels?

The Michaels Companies, which owns the Michaels craft stores and the Aaron Brothers framing chain, is set to begin trading Friday in its return to the market. Investor enthusiasm may not be as strong as the company had hoped, however. Shares were priced Thursday evening at $17 each, at the bottom of the expected range of $17 to $19 a share.

At that price, the company raised about $472 million, less than the $500 million it was hoping for. The stock will trade under the symbol MIK.

The response to the IPO for Michaels, the largest arts and crafts chain in the U.S., will give some indication of how investors feel about consumer spending. The company has nearly 1,300 stores and rang up $4.6 billion in sales in the fiscal year ended Feb. 1. Sales have been growing, but the retail sector in general has stumbled in an economic recovery marked by fits and starts.

It's been a long road back to the public markets for Michaels, which was taken private by private equity firms Blackstone Group and Bain Capital in late 2006 for $6 billion. It tried to go public in 2012, but postponed the offering after its then-CEO, John Menzer, had a stroke and stepped down.

Bain and Blackstone have been itching to get more of their money back since taking Michaels private. The firms will each own about 39 percent of the company after Friday's offering, PE Hub reports.

Michaels had about $588 million in debt before its sale to Bain and Blackstone, but now is shouldering $3.7 billion in obligations. That mountain of debt is overshadowing the company's IPO.

"It looks like a private-equity sponsored train wreck," writes Equities.com.

Sales at the company's stores rose 5.9 percent for the first quarter from a year earlier, and the ratio of the company's expected share price compared to its earnings for its last full year is a decent 15. That should be enough to get some institutional investors interested, Equities.com notes.

Bain and Blackstone have certainly profited from the deal, reports PE Hub. Their stakes will likely each be valued at around $1.4 billion. They also each received about $333 million in the one dividend Michaels paid out since its 2006 buyout. Each firm will likely make about $35.2 million if the offering's overallotment option is exercised. That totals $1.8 billion, or about 2.2 times the $800 million the firms initially put into in the buyout in 2006.

There hasn't been a major retail IPO since The Container Store (TCS) hit the market in November. The Container Store priced its offering at $18 a share and saw shares double to $36 on the first day of trading. But shares have steadily fallen since then to close Thursday at $29.41.