Wait and see the details before making a call

In a market devoid of company listings, the speculation about the float of popular Kiwi retail chain Kathmandu has been intense.

Kathmandu is a great brand with a place in the hearts of many New Zealanders and Australians who love camping and the outdoors.

But for the sceptics - and there are plenty right now - that is just one of several reasons to approach the sale with caution.

In the past that emotive connection with a brand has proved a trap for retail investors who have found themselves heavily invested in companies that have under-performed or - in the case of Feltex - failed completely.

But it would be a mistake to write off Kathmandu before the price, the accounts and the details of its growth plans go on the table.

It is true that private equity doesn't have a great track record with public floats and there are valid reasons to question the timing of the sale. Why would anyone sell into this market unless they were under some sort of pressure?

But that doesn't mean we are about to see a fire sale. In fact those expecting a bargain basement price are likely to be disappointed.

The Kathmandu team believe they have a strong company with steady, achievable growth plans.

They say they have high margins and excellent brand recognition.

The owners will also argue hard that they have not followed the stereotypical private equity model of slashing and burning.

They say they have invested millions in growing the company over the past three years.

They added 15 stores in 2008 and another eight this year despite the tough retail climate. Plans for 10 more stores in 2010 don't look unrealistic.

The issue is how much more capital is needed to achieve the required growth and the timeframe for reasonable returns.

If it is the case that the capital requirements and timing no longer meet the criteria for these private equity owners then how does that story fit with equity market investors? Possibly very well. But the devil as always will be in the detail.

If it is a partial float and the current owners keep some skin in the game, that would help reassure some investors. That is likely to be the case.

But it is also likely that the stake retained by the current owners will be a lot smaller than the stake floated. This is expected to be a big sell-down.

In all probability the exact size of the float will be determined by the market and the appetite that institutional investors have for the shares.

As Tyndall's Rickey Ward notes, investors would be wise to watch the reaction of the big guys before leaping in on this one. In any case, as the only thing going in the IPO market, retail investors can be sure this float will be subject to plenty of public scrutiny.

The institutions are starved of floats but they are going to retain a highly critical eye. The owners and management believe they have a good story to sell. It is going to be fascinating to watch the process unfold.