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OPINIONFinancing

Fatburger’s owner goes back to the Reg A well

Franchise concept collector Fat Brands is refinancing its debt by trying to raise another $30 million from public investors, says RB’s The Bottom Line.
Photograph courtesy of Fat Brands

the bottom line

Two years ago, Fatburger owner Fat Brands became the first restaurant chain to go public by selling stock to customers and others in what is known as a Regulation A+ initial public offering, or mini IPO.

The company since then has made a series of acquisitions while also searching for new ways to finance those deals, including through a particularly costly loan from a hedge fund owned by Sardar Biglari, the chairman of Steak ‘n Shake owner Biglari Holdings.

It is now hoping that investors will help refinance that debt. The company is planning a $30 million follow-on offering through the same Regulation A process as before. It will be one of the first companies to use the process in a secondary offering.

Fat Brands plans to use the funds to refinance its debt and to make additional acquisitions.

The Los Angeles-based company has been one of the better-performing restaurant companies to use a mini IPO to raise cash, though that isn’t saying much.

One company, iPic Entertainment, has filed for bankruptcy protection, all but wiping out the value of that stock. Another, Muscle Maker Grill, was unable to raise much at all with its offering.

Fat Brands is still rolling along, though it is trading at about 60% below its offering price despite several acquisitions that have greatly increased its size. EBITDA, or earnings before interest, taxes, depreciation and amortization, more than doubled last quarter, while revenues rose 51%.

Regulation A+ offerings relax some standards on IPOs, essentially enabling companies to sell stock to customers. Congress approved the relaxed standards to encourage more small business investment as the economy was struggling to emerge from the recession in 2012. It’s a far different economy now.

At one point, advocates for mini IPOs proclaimed them as the wave of the future in finance, and many believed they’d become a key ingredient for restaurant chains in need of expansion cash. Restaurants, after all, need to raise a lot of money, and have a lot of customers that might want to buy stock.

Some companies then were able to get on one of the major stock exchanges. Fat Brands, for instance, trades on the Nasdaq. But the major exchanges have started frowning upon such companies, according to the Wall Street Journal, citing poor performance by companies using this type of financing.

Fat Brands has been collecting brands largely by taking advantage of a market loaded with struggling concepts available at ultralow valuations. The company operates Ponderosa and Bonanza steakhouses, Hurricane Grill & Wings, Yalla Mediterranean and Elevation Burger, in addition to Fatburger and Buffalo's Cafe.

Its $10 million deal for Elevation Burger highlights the creativity Fat Brands is using to get such deals done.

Financing such acquisitions apparently isn’t simple. The $24 million IPO in 2017 helped fund the Ponderosa purchase. And the company has worked on financing since then, often accepting high rates to both refinance existing debt and to satisfy its thirst to add chains to its collection.

The loan from Biglari's Lion Fund, for instance, refinanced a prior high-cost loan. Fat Brands has since borrowed another $3.5 million under that loan and extended the maturity until next June in exchange for a $500,000 fee.

The cost of its debt keeps the company from generating more profits. Its interest expense in the second quarter was $1.3 million. By comparison, it took in just $5.9 million in revenues during the period. It generated a net loss of $508,000.

The latest offering is a preferred stock offering that is basically just another form of financing. The company is selling 1.2 million preferred shares for $25 apiece. These shares earn a dividend of 8.25%, paid quarterly. Fat Brands expects to buy these shares back within five years.

For the company, that 8.25% dividend is considerably smaller than the 20% interest on the loan from Biglari (or the 15% on the loan before that). It also escapes some of that loan’s provisions, notably one that converts the loan into stock in Fat Brands.

That said, Fat Brands is taking a risk that investors will be interested in the opportunity enough to provide the company with $30 million in financing. The preferred shares will not be listed on Nasdaq, so their market is far more uncertain.

All that said, the offering could give Fat Brands some more ammunition to use to make further deals. With so many struggling brands out there, the company will have plenty to choose from.

“We are generating efficient, low-cost capital with little restrictions compared to other forms of financing,” CEO Andy Wiederhorn said in an emailed statement. “The flexible bridge loan coming in at sub-10% for a five-year investment allows us to quickly acquire additional brands with the goal of moving them to long-term, low-cost financing as quickly as possible.”

UPDATE: This post has been updated to include a comment from the company.

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