On the Margin
Habit postpones its secondary offering

Habit postpones its secondary offering

This post is part of the On the Margin blog.

The Habit Restaurants announced on Thursday that it was going through with a secondary offering of its stock entirely by existing shareholders looking to exit their investments.

On Friday, Habit postponed that offering. The company cited “current capital market conditions” and stressed that its secondary had been postponed, not withdrawn.

Those market conditions suggest that institutional investors that buy stock in initial public offerings and secondary offerings weren’t willing to give the shareholders the prices they wanted for their stock. These important investors don’t have the appetite they did just a couple of months ago and the market has tightened.

This was the first delayed secondary offering in the restaurant business in a long time. And it’s been three years since a restaurant offering of any sort has been postponed. Dave & Buster’s and CKE Restaurants postponed initial public offerings during a particularly turbulent market in 2012.

Habit’s postponed secondary came as two companies delayed initial public offerings — Truck Hero, which makes consumer accessories for pickup trucks, postponed its offering, as did Noble Midstream, an energy company. Duluth Holdings, a retail clothing shop, managed to price an IPO under its estimated price.

The restaurant industry has generally performed above the market. But investors’ enthusiasm for the business has waned since the winter, when both Habit and Shake Shack, Inc., more than doubled on their public market debuts. None of the companies that have gone public since then have come even close.

Investors didn’t much like the idea of a Habit secondary. The stock fell by 9 percent Thursday after the announcement. And they were happy with the decision to postpone the offering — it’s up more than 7 percent today.

In addition, Habit’s stock price has come down throughout the year. Habit went public in November one year ago today. It priced at $18. Trading opened at $30. And it closed trading that day at $39.54, up nearly 120 percent. That was one of the best openings in restaurant industry history.

One month later, the price hit an all-time high of $44.20. Yet it has fallen since. Before the secondary announcement, Habit’s stock had lost nearly half of its value since then. By opening on Friday it had fallen to $21 per share, not far above that $18 level.

Shake Shack has similarly lost half the value of its peak, but it skyrocketed so much after its IPO that it is still trading at double its IPO price. That performance has enabled multiple secondary offerings of its stock.

Habit’s postponement illustrates the issues associated with some of these early-company IPOs and the aggressive valuations many of these companies received following their offerings.

Habit had a spectacular debut. And in the first quarter of this year reported 12.6 percent same-store sales growth. But that sales growth has slowed precipitously in the quarters since, to 8.9 percent in the second quarter and 2.9 percent in the third quarter.

That slowing performance has clearly sapped investor enthusiasm for the chain. As a result, its once strong valuation has fallen, and that has hurt the ability of its shareholders to exit their position. KarpReilly, the private equity group that planned to sell much of the shares in the secondary, will have to wait for a better market to sell its shares.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze

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