Is This IPO on the Mark?

Aramark  (NYSE: ARMK  ) , the food and facility services giant that went public today, has what could be considered a captive clientele; therefore, investors should expect the company to follow through on the promise that it can provide sure and steady growth. As one of the largest food and facility service operators with a global footprint, its backers believe the IPO will likely be met with a bit of gluttonous buying, because  it priced itself at the low end of the expected $20-to-$23-per-share range.

Aramark's customers eat what it dishes out -- it services sports teams, universities, health-care and correctional facilities, and Fortune 500 companies. This provides it with a steady diet of revenue totaling $13.8 billion over the last 12 months. However, the company still has a sizable debt-ladened balance sheet of almost $6 billion in long-term obligations, plus an additional $1.1 billion in interest payments on that debt. 

Having gone in and out of the public markets several times over the years -- this IPO marks its third bite at the apple -- Aramark's private equity owners have continued to keep its debt balances high. To its credit, though, it's been able to support that weight because it operates a very steady business in terms of revenues, profits, and cash flows. The IPO can even improve the situation to a certain extent because part of the proceeds will go toward paying down the bill.

Yet, it also seems inescapable that its P/E owners purposely handcuffed the food service operator because of that stability. They paid themselves a handsome $712 million dividend back in 2011, heaping debt on Aramark to finance it, which was on top of the debt already issued in the leveraged buyout that took it private in 2007. They also gave themselves a dividend in the form of shares in Seamless North America when they spun off that division last year. Aramark says it intends to pay a dividend to shareholders, but admits its ability to pay is limited by its debt covenants.

Debt is always a risk in the event of another economic downturn. Revenues at Aramark tumbled 10% in 2009 because of the recession, and it's taken several years to build them back up to pre-recession levels. Although the company seems like it's on the right track to keeping them growing, and the economy is making steady though painfully slow gains, it relies heavily upon Sysco  (NYSE: SYY  ) for distribution.

Aramark counts on Sysco to distribute approximately 60% of its food and non-food products in North America, and the distributor just found it necessary to make a $3.5 billion acquisition of U.S. Foods to jump-start its own revenue growth.

Sysco's profits have been fairly stagnant the past few years. Swallowing companies of this size rarely happens without indigestion, and if Sysco gets agita as a result, you can expect Aramark to get heartburn, as well, even if it says any disruption in the agreement would only be short-lived.

There is opportunity for growth, though. The food service giant notes that only 11% of its customers use both its food and non-food services, so pushing for greater collaboration there could be one prong of an attack to expand. However, not every business needs both food and, say, uniforms, which account for 10% of the company's 2012 revenues.

Four companies -- Aramark,  Cintas, G&K Services, and UniFirst -- control 60% of the market that has virtually nonexistent turnover, a situation that provides another solid revenue stream. Most of Aramark's revenues are derived domestically, and being one of the few able to read international markets gives it a significant advantage.

The recession was hard on uniform providers, as manufacturing jobs disappeared, and the auto and housing industries took it on the chin. They all seem to be coming back smartly, if not as robustly as many would prefer. Europe remains dicey in economic turns, but if a recovery gains a footing there, exporting its business ought to help.

These PE-backed IPOs are effected for the benefit of their owners and not the shareholders that would buy in. Therefore, I'm not particularly keen on pulling a chair up to the dining table -- at least not right away. Even if it jumps out of the gate at the start, I think we'll find that there's plenty of time to answer the dinner bell with Aramark.

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