Restaurant week for IPOs: Outback Steakhouse, Carls Jr. going publicAugust 7, 2012: 4:14 PM ET
It's "Restaurant Week" at U.S. stock exchanges, with Outback Steakhouse owner Bloomin' Brands and Hardees parent CKE selling shares to the public this week.
Bain Capital-backed Bloomin' Brands (BLMN), which also owns smaller chains like Carrabba's Italian Grill and Fleming's Prime Steakhouse, is set to debut on the Nasdaq (NDAQ) Wednesday. CKE (CK), backed by private equity firm Apollo Global Management, also owns Carl's Jr. and is expected to start trading Friday on the NYSE (NYX).
The private equity owners of these heavily indebted companies are betting that investors, so enamored with restaurant stocks these days, will gobble them up.
"Big institutional investors want exposure to the restaurant sector," said Will Slabaugh, a restaurant analyst at Stephens. "There aren't a ton of ways to do that."
With the exception of Del Frisco's (DFRG), the restaurant sector has offered juicy returns this year. Ignite Restaurant Group (IRG), owner of Joe's Crab Shack, is up 7% since it went public and Tex-Mex chain Chuy's (CHUY) has soared 47% since its debut. Meanwhile, shares of Dunkin Brands (DNKN) are up nearly 60% since the doughnut chain's July 2011 IPO.
And investors are seeking more ways to whet their appetite this week. Late Tuesday, Bloomin' Brands sold 16 million shares at $11 apiece. That's less than it had hoped to sell and the IPO was priced below the estimated range of $13 to $15. That may not bode well for CKE, which plans to sell 13 million shares in the $14 to $16 range through its IPO Thursday.
Both PE-backed companies are laden with debt, and CKE has so much of it that the restaurant chain will have trouble generating any profit after paying interest on roughly $730 million of debt.
Apollo bought CKE in April 2010 for nearly $700 million. As part of that buyout, Apollo immediately extracted a $190 million profit, after writing a $250 check. Since then, it hasn't paid off much more of the restaurant chain's debt load.
"It's a somewhat typical leveraged buyout deal. The chain was running just fine until Apollo bought them," said Francis Gaskin, president of IPODesktop. "With all its debt, the company has to run very fast just to stay in the same place and break even. "
By contrast, Bloomin' Brands is saddled with $1.5 billion of debt, but Gaskin says Bloomin' Brands' earnings are not solely going to pay down debt. In fact, it booked a $100 million profit on $3.8 billion of revenues in 2011.
Bain Capital and Catterton Partners spent $3.2 billion in 2006 to take the company, then known as OSI Restaurant Group, private. Since then, the PE firms were able to pay down a substantial portion of Bloomin' Brands debt
Still, the problem for both of these brands is whether there's another neighborhood that needs or even wants an Outback Steakhouse or Carls' Jr. Bloomin' Brands has more than 1,000 restaurants already and CKE has more than 3,000 locations.
Another dicey issue: The drought. It's almost inevitable that food costs will rise and dampen the profit margins of both companies.
Even with the potential pitfalls, analysts who track the interest in IPOs say that Bloomin' Brands is "0versubscribed", meaning institutional investors have asked for more shares than the underwriters have available. CKE also has a decent amount of interest.
This week, investors will be looking to see whether steaks will trump burgers.