For years we've advised investors to be extremely cautious when it comes to IPOs, because first and foremost IPOs are financing activities for companies -- a way for them to raise money. There is always time to wait a few years and see how a company performs before buying shares. The occasional exception to this rule is spinoffs from other public companies, which generally come with a long history of data.
Otis Spunkmeyer, which has filed a registration statement and sells frozen cookie dough, muffins, and other baked goods to customers such as Subway, Target
The company's primary use for the cash to be raised in the offering is to pay down portions of its debt at 18.5% and 19.5% interest and to redeem its preferred shares. Going public to pay down the debt makes a great deal of sense for the business, but as this debt was taken on by management and other backers to finance the purchase of this company, I see this sale primarily as an opportunity for them to recoup their investment. As an aside, I do find it a bit interesting that Otis Spunkmeyer will lower its cost of capital by issuing equity to pay down its very high-interest debt.
Looking at the financials of the company, I'm uninspired. Until 2005, the company failed to cover the interest on its debt with operating earnings and the company has deep-pocketed competitors in Sara Lee
There are lots of good reasons to go public that I can see for the current owners of Otis Spunkmeyer and for the health of the company in general. However, I can't imagine a reason for me, as an individual investor, to be committing funds to buying these shares in an IPO or shortly thereafter. There are simply too many companies in this arena with long track records and well-known management teams that are trading at reasonable valuations for me to chase this IPO.
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