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News from Wall Street: CKE Restaurants IPO Pulled at Last Minute

Late Thursday, CKE Restaurants announced that their planned initial public offering (IPO), to return to the New York Stock Exchange, had been cancelled due to “market conditions.”  Market conditions is Wall Street speak for that investor demand for the hoped $14 to $16 stock was too weak.

The offering was withdrawn at the last moment, just before its scheduled debut Friday.

CKE Prospectus for IPO. Unfortunately, it is pulled.

A prospectus for a CKE IPO with various investment bankers underwriting it.

The parent of the 3400 units Carl’s and Hardee’s was taken private in 2010 by the Apollo Private Equity Group, and hoped to reenter the market based on improved same store sales results at both brands and perceived market appetite for restaurant stocks. The problem is that restaurants sector sales conditions have weakened almost globally in the last 50 days, and four other restaurant IPOs had already went public since June. For example, McDonalds (MCD), the symbolic restaurant bellwether reported an earnings miss in July and this week reported negative same store sales in all major regions.

CKE will be embarrassed, as will the big investment banks marketing the deal (Morgan Stanley, Citi, Goldman Sachs were the leads, and six others). Their time is lost and success fees aren’t paid.

There should be no direct impact to franchisees. CKE will continue to operate and continue on its operating plan. The IPO proceeds were to be used to pay down debt.

Other than weakening restaurant industry fundamentals, here were the other issues with the CKE offering:

  • Low absolute level of profit dollars: CKE’s long term debt was high, almost $1.5 billion, a legacy of the buyout. Even though profits were improving, the interest expense would have made for low absolute levels of profits, and would have made for a very costly stock price to earnings ratio, which turns off investors.
  • High debt ratio:  Also, as a result, the company’s debt to EBITDA (cash flow before facilities, and interest) ratio would have been high—about 8 times or more per my calculation. That is very high factor, and the ratings agencies likely would have choked.
  • Not high enough sales growth: Its same store sales had moved from negative territory in 2008 through 2010 to a positive 2.6% just last quarter. Investors want a strong same store sales trend of mid single digits or more. That is to say a trend of a positive 5 percent growth in sales or more.

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John A. Gordon, founding principal of Pacific Management Consulting Group provides analysis and advisory services relative to complex restauant topics. This includes buy or sell due diligence, operational analysis and improvemenrs, expert litigation support and business investigation and analysis.

Gordon focuses on restaurant strategy, operations and financial management topics, and has a 45-year background in restaurant operations and financial management staff roles for both franchisors and franchisees. He is a certified Master Analyst of Financial Forensics (MAFF). He supports both franchisees and franchisors, and has a franchise standards and practices sub speciality.

Pacific Management Consulting Group provides creative, detailed and effective insight, independent research and analysis that is free of conflicts of interest. The company provides chain restaurant earnings and economics analysis, research, expert witness engagements, suppors both consulting and sell side equity research firms, due diligence and other analytical investigations. He routinely partners with other restauant subject matter experts in a variety of specialities.

Visit him at Pacific Management Consulting Group. Contact him by email or call (619) 379-5561. Gordon blogs on on his website and publishes discussion papers; his press clips and a real time restaurant analysis blog, is included.

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Franchise Operations