On the Margin
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The IPO market slowly makes comeback

Blog: After taking a year off, companies looking for public equity again

This post is part of the On the Margin blog.

Last month, the fast-casual health food chain Freshii filed for an initial-public offering in Canada.

This week, Reuters reported that CEC Entertainment Inc. is readying its own initial public offering in the U.S., for the second half of the year.

The IPO market, it seems, is making a comeback.

Equity investors couldn’t get enough of the restaurant business from 2013 through 2015. Several companies had their IPOs in that period, some of which were remarkably small. Investors, hoping to find the next Chipotle Mexican Grill, gave these companies outsized valuations.

Non-public restaurant valuations went up at the same time, and sellers of restaurant companies upped their own asking prices, sensing the market had shifted.

But the overall IPO market slowed and restaurant companies opted against going public in 2016. The market for such companies turned sour after many newly public companies failed to meet lofty expectations and chains such as Papa Murphy’s Holdings Inc. and Noodles and Co. crashed.

One classic example: The sandwich chain Jimmy John’s was about to start promoting its offering with investors when it backed out in the fall of 2015. Last year, the sandwich chain was sold to Roark Capital.

Yet the overall IPO market is expected to improve this year — popularity of the Snapchat IPO, for instance, is anticipated and is generating heavy competitions among the major stock exchanges.

And after a relatively weak 2016, restaurant stocks in recent weeks have been on a comeback, thanks to the so-called Trump rally. An improving stock market is the best way to lure companies to the public markets.

Freshii’s filing in Canada last year was the first sign of a thaw in the restaurant IPO market — even if the Toronto-based chain is selling stock to investors in Canada, rather than the U.S.

The company recently said it plans to sell 10.9 million shares of stock at an expected range of $8.50 to $10 in Canadian dollars, or $6.39 to $7.52 U.S. — which would raise about $82 million if the stock sells at the top end of range. 

Irving, Tex.-based CEC would be a much bigger offering, however. It would also be a relatively quick return to the public markets for the operator of pizza and games concept Chuck E. Cheese. (Apollo Global Management took Chuck E. Cheese private in 2014 in a $1.3 billion deal.) 

The company could pursue a sale if it received the right offer, the Reuters report suggests. It’s not uncommon for companies to use a filing as something of an auction.

CEC has worked to improve its food and its operations in recent years with good results. Revenues in the first nine months of 2016 increased 3 percent, according to SEC documents. Net income quadrupled in that period, to $6.5 million.

Paving the way for a CEC offering this year has been Dave & Buster’s Entertainment Inc., which has thrived — the company’s same-store sales increased 5.9 percent in the quarter that ended Oct. 30, for instance. Dave & Buster’s stock is up 60 percent over the past year.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

TAGS: Stock Data
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