Xspand Breaks from Peers, Trades up 33% from IPO, Buyers Include Family Offices
Most Regulation A+ companies have found themselves locked in negative trading ranges since their initial public offerings. Has the latest IPO finally cracked the code for a better performance?
There’s a good chance that Xspand Products Lab (ticker: XSPL) has done just that. The toy-manufacturing and packaging company, which began trading on May 3 after pricing at $5 a share, has since seen its stock rise 33%. That compares with price declines for eight of the previous nine Reg A listings on major exchanges along with one that has been delisted from Nasdaq.
Xspand pulled ahead of the pack for multiple reasons – all of which may provide a blueprint for other companies contemplating a Reg A IPO. First, Xspand has a healthy existing business with a long operating history and real profits. The toy side of the business makes customized products for theme parks, with clients such as Disney Parks and Resorts, Busch Gardens, and Sea World. That is a niche market where order numbers are relatively small and close relationships help ensure repeat contracts.
The other part of Xspand, which also sports a healthy profit margin, makes packaging for major pharmaceutical makers, including large players based in New Jersey near the company’s Pennsylvania headquarters. Altogether, Xspand earned $15 million of revenue last year and $1.5 million of net income.
Even more importantly, the IPO was priced at a sensible level. At $5 per share, the company had an enterprise value of 1.6 times 2017 sales and 13 times EBITDA. While not dirt cheap, the valuation makes sense given sales were temporarily hurt last year after school shootings prompted Disney to cancel orders for toy weapons. By comparison, many previous Reg A deals attempted to fetch very high valuations before businesses were proven. In some cases, business plans being pitched ahead of IPOs were half baked and seeking astronomical valuations.
Xspand’s robust core business and sensible valuation helped attract a breed of investors who didn’t go for previous Reg A deals. A majority of the IPO dollars invested came from institutional investors, including family offices, according to a person familiar with the matter. That compares with little or no institutional investors for most Reg A deals to date.
Family offices, which are entities created to manage wealth for high-net-worth families, oversee between several million and billions of dollars and generally have a dedicated chief investment officer. They have become increasingly prominent as families branch out into a wider array of investments.
How do institutional investors change the IPO process? One distinction is that they are more disciplined about what they buy. “Sophisticated institutional buyers are likely to develop their own views on appropriate valuations and purchase only when shares are sold at a rational price,” says Robert Malin, Head of Equity Capital Markets at WR Hambrecht + Co, which wasn’t involved in the Xspand deal but has worked on Reg A offerings.
Once stocks begin trading, institutions including family offices have more flexibility to build their positions. Since they have done valuation analysis and likely not taken their largest-allowable positions, they have scope to buy more shares rather than panic if stocks trade poorly. Retail investors, by contrast, often lack such resources or conviction, so are spooked more easily.
Mr. Malin also points out that many retail buyers will trade out of an IPO to invest in another offering. As the next deal comes, they can be forced to sell out of a position due to limited capital. Institutions, on the other hand, don’t face such a constraint.
Family offices in particular may have longer investment horizons than other institutions – such as hedge funds. Without concerns about limited partners requesting redemptions, a family office can see an investment through rather than give up if it drags on performance.
For Xspand, the key will be executing its strategy of acquiring smaller brands that generate about $1 million in annual sales with free cash flow and help nurture them into more-valuable assets. The company plans to use its expertise in manufacturing, packaging, and high-profile customer relationships to bring brands to market faster than they could otherwise.
Of course, Xspand will need to deliver strong results in coming quarters to make investors happy. But unlike most Reg A deals to date, the company has the pillars of support in place – its valuation and sophisticated shareholders – to keep the stock afloat for a while.