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Shake Shack is latest to take first bow


The valuations are eye-popping, pegged at $150 per burger sold in 2014 at Shake Shack, as one analyst puts it. Can restaurant chains continue their strong debuts? It looks like anyone with a good growth story will try.

Now that Americans are less guarded with their fun money and consumer confidence is on the rise, a host of franchise operators have sought to cash in on the better times and favorable demographic trends by taking their companies public—with rumors that several more brands may be greeting the public markets by the end of 2015.

Last year, Zoe’s Kitchen, Papa Murphy’s and El Pollo Loco were the poster children in the franchise restaurant space, each raising a bundle of cash and generating a raft of press following their initial public offerings.

After selling 5.8 million shares at $15 per share in April, Plano, Texas-based Zoe’s Kitchen raised $87.5 million with its IPO. At press time, ZOES was trading just below $30—not a bad debut.

Papa Murphy’s, the take-and-bake pizza concept based in Vancouver, Washington, raised $64 million last May by selling 5.8 million shares at $11. Starting in mid-December, FRSH shares have been on an upward trend, recently closing above $13.

El Pollo Loco had one of the more dramatic “IPO pops” in July, as the chicken fast-food chain sold 7.1 million shares at $15 each, raising more than $107 million for the Costa Mesa, California-based company. LOCO shares have recently been trading above $25.

Damon Chandik, managing director at Piper Jaffray in San Francisco and head of the firm’s restaurant group, says the key takeaway from these restaurant companies going public, including the highly publicized Shake Shack IPO in February, is that the market loves a “good growth story.”

“They’re willing to pay a lot of money for growth, and so whether it’s Shake Shack or The Habit or Zoe’s, the true differentiator both on demand and valuation is how much growth the markets believe they have in front of them,” he said.

Public logic

There are several reasons a company’s board would decide to go public, but Chandik said the primary ones include returning liquidity to existing investors, providing financial incentives for employees and, what investors like to see the most, raising capital to fund growth of the business.

“When your options are to put money in the bank and get one percent or less on your income or to put money into a high-growth consumer company,” he said, “that helps as one of the drivers of the overall markets.”

He added as more QSR and fast-casual concepts hit the market while the economy heats up, the best candidates for going public are larger chains that have proven themselves in diverse markets and appear to have national and, perhaps, even international growth potential.

High valuations

Steven Rockwell, managing director at Janney Securities in Baltimore, who has worked on the investment side of the restaurant industry for more than 35 years, called the current pace of restaurant IPOs “aggressive,” adding it’s an excellent time to be a seller, whether selling a business outright or taking it public.

“Valuations are historically high and there’s a lot of interest,” he said. “The public market interest is exemplified by Shake Shack and Habit Burger, the two most recent deals, and the private equity business is exemplified by numerous deals that have taken place over the last six months.”

Investors in Zoe’s and El Pollo Loco have made a lot of money as their stock prices have risen, and Rockwell said there’s a “herd mentality” at play where investors are seeking to replicate that success with the next hot restaurant concept. “Demographics favor the segment,” he added about fast-casual. “It’s less labor intensive, the locations are generally smaller than casual dining, so you can tick off a bunch of fundamental attributes of that segment that creates an interest—and then one other factor is the success of Chipotle.”

Beyond past successes, he said another factor in the larger number of franchise restaurant IPOs is the big amounts of money available to invest, especially in the current era of near-zero interest rates.

Brad Swanson, managing director of investment banking at KeyBanc Capital Markets in Atlanta, believes restaurants are in favor with institutional investors and lenders because of the improving economy, falling unemployment rates, lower gas prices and the general trend of Americans feeling pressed for time. Instability in foreign currency markets has only added to the investment appeal of American QSR and fast-casual restaurant concepts, he said.

Comparing present trends with previous market undulations, Swanson feels the category is halfway through its current growth cycle and cautiously expects the restaurant rally to last through 2020.

$150 per burger

Looking at historical business valuations, the quick-service dining segment has averaged a 10x EBITDA valuation, which dipped to 5x in 2009, according to information presented by KeyBanc Capital Markets at the Restaurant Finance & Development Conference in November.

Here in 2015, average valuations for quick-service restaurants are approaching 14x EBITDA, also known as gross earnings, which is significantly higher than any time in recent memory.

As the latest example, Shake Shack went public at $21 per share and was trading near $43 at press time after approaching $50. That gives the Manhattan-based burger chain a market value of $1.6 billion—equating to more than $25 million per location, or as MarketWatch’s Steve Goldstein put it, approximately $150 per burger sold in 2014.

When asked how long such exuberance could continue, Chandik said examples like Shake Shack suggest even more chains will be looking to go public in the coming months.

“There is still a lot of demand out there when you look at the price performance of the recent deals that have come out—and the vast majority have traded up,” he said. “In today’s market when you’ve got companies trading the way they are, it’s really pushing most of the high-growth names toward an IPO exit.”


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