For those of you who think Facebook (Nasdaq: FB ) scared the IPO market into hiding, think again. Facebook, whose bungled IPO cost both common investors and brokerage houses millions, did cause a temporary lull in debuts, but IPOs have been hitting the market in recent weeks at a rapid pace.
Since July 19, we've witnessed 16 separate IPOs, including those of three restaurant companies: Chuy's Holdings (Nasdaq: CHUY ) , which operates restaurants in Texas and has jumped 50% since its debut, Del Frisco's Restaurant Group (Nasdaq: DFRG ) , which owns steakhouses throughout the United States and is down 2% since its debut, and Bloomin' Brands (Nasdaq: BLMN ) , owner and operator of Outback Steakhouse, Carrabba's Italian Grill, and Bonefish Grill, which debuted earlier this week and is up 23% already. Fast-food chain CKE, operator of Carl's Jr. and Hardee's, is expected to follow Burger King's (NYSE: BKW ) footsteps with its debut soon, although it just delayed its IPO. Burger King, if you recall, just went public (again) after being taken private back in October 2010.
With a sudden influx of restaurant IPOs coming to market, you might think they all have Chipotle envy or something, but that's not the case for one particular new issue. Bloomin' Brands is a bloomin' bad company, and I feel it could give the highly anticipated Manchester United IPO a run for its money in terms of which is worse.
A Bloomin' bad idea
For starters, let's look at the motivation behind the company's plans to reemerge into the public realm after being privately held by Bain Capital and Catterton Management since 2007. In Bloomin' Brands' initial S-1, filed in April, the company noted that its intention was to raise $300 million to completely pay off $248 million in senior notes, and use the remainder for general corporate purposes. "Why?" you might ask. That's because as of its April filing, Bloomin' Brands was sporting a hefty $2.1 billion in debt.
Fast-forward to its debut this week and you'll notice that not only did the offer price drop dramatically from the $13-$15 range it had hoped for to $11, but the original plans it had to offer 10.7 million shares from Bloomin' and another 10.7 million shares from the Bain Capital/Catterton consortium went out the window. Instead, just 16 million shares were sold between the two, with roughly $166 million being raised -- well short of the $300 million it had been targeting.
No big deal, right? Actually, very big deal. The $248 million in senior notes due in 2015 carries an interest rate of a whopping 10% per year. In 2011, Bloomin' reported a $100 million profit on $3.8 billion in sales! That grotesquely putrid profit margin of 2.6% leaves the company little room to funnel cash flow to the payment of these senior notes.
What's more, $1.1 billion of Bloomin's debt is variable-rate, with quite a bit due over the next few years. According to the company's amended S-1 (page F-39, for those interested), it has $332 million in debt repayments due in 2012, about $88 million due in 2013, nearly $938 million due in 2014, and another $259 million (including the $248 million in senior notes accruing 10% interest) due in 2015. Exactly how is Bloomin' going to come up with that kind of cash given its 2.6% profit margin? Don't look at me, because I don't have the answer to this riddle either.
As the icing on the cake, rising input prices are threatening to eat into Bloomin's already razor-thin bottom line. Corn prices are teetering near record highs due to drought conditions that are affecting prices for everything from chicken and eggs to milk.
Say what you will about Manchester United, but Bloomin' Brands gets my vote for worst IPO of 2012. I'll be backing up my pessimism with a CAPScall of underperform on the stock.
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