A Sexy IPO but Will it Pop?

Sex may sell, but investors may not be ready for an IPO this hardcore.

Penthouse magazine publisher FriendFinder Networks Inc., which operates adult entertainment and networking Web sites like Bondage.com, AdultFriendFinder.com and HotBox.com, hopes to raise $220 million in an initial public offering this week. Analysts say the IPO could serve as a litmus test for the emerging social networking sector, but aren't sure how investors will receive its racy content and weak balance sheet.

"It's hot, but not in the IPO sense," said Francis Gaskins of IPOdesktop.com, noting that the adult subscriber base is decreasing. Recently, sales have been flat and the company has had difficulty servicing its heavy debt load.

FriendFinder, which changed its name from Penthouse Media Group in 2007, will sell 20 million shares. The stock is expected to price between $10 and $12.

Paid-usage pornography, personal ads and other graphic content make up about 70 percent of revenue for the Boca Raton, Fla. company, which emerged from a bankruptcy in 2004. Its most popular site is AdultFriendFinder.com, a forum for people with a variety of sexual interests, and those looking for an immediate tryst.

The other 30 percent comes from what it calls "general audience" social networking sites that include Amigos.com, SeniorFriendFinder.com and BigChurch.com, which is designed to bring "people together in love and faith."

Because the market has eagerly been anticipating debuts of social networking sites Facebook and MySpace; micro-blogging site Twitter; and business networking site LinkedIn, investors may pay close attention to how FriendFinder fares, said David Menlow, who runs IPO research firm IPOfinancial.

There aren't many comparable social networking IPOs. In 2004, PlanetOut Inc. made a market debut under the ticker LGBT - also the acronym referring collectively to lesbian, gay, bisexual and transgender people. The company's shares plummeted, however, from the $9 offering price to 38 cents before being acquired in June by media company Here Networks LLC.

"This is very reminiscent of the early days for Internet platform companies," Menlow said. "It's a very bold move to come into the market on the beginnings of a social networking focus by IPO investors. But it's a new arena, and certainly the ubiquitous nature of these types of sites could lead people to think they've found the next hot sector."

Still, investors may be uneasy about FriendFinder's financials, analysts said. Sales have been flat, though revenue edged up on an increase in prices for its 1 million paying subscribers. The company said in a regulatory filing that net revenue was $244.4 million in the nine months ended Sept. 30, compared with $243.9 million in the same period a year ago.

Meanwhile, the company is paying a heavy $75 million in interest on operating profit of $45 million, and is carrying a debt load of $471 million. FriendFinder said in a regulatory filing that proceeds from the offering would be used to repay debt.

"I think this is a case of going public or going broke," Gaskins said. "They're just too leveraged to stay afloat."

The stock will trade under the symbol "FFN" on the Nasdaq Global Market starting Thursday.

Renaissance Securities (Cyprus) Ltd. and Ledgemont Capital Group are managing the offering. They have the option to purchase an additional 3 million shares.