The surprising sale of Fogo de Chao this week to Rhone Capital probably shouldn’t have been much of a surprise at all.
With valuations for public companies lower than many of these companies can find in a private sale, take-private deals such as this can be expected in the coming months.
Fogo went public in 2015, selling stock at $20 a share. It would increase into the 20s, but then began falling and settled into the low teens, where it had been trading ever since.
The decline wasn’t because of any particular issue. Fogo operates restaurants with unit volumes of nearly $8 million, and restaurant-level margins of 27.5%—making those locations some of the industry’s most profitable. Its offering is also relatively unique. There are no real Brazilian steakhouse chains in the U.S., at least not of any size.
But investors have grown skeptical of many of the restaurant chains that went public from 2013 through 2015, when aggressive valuations lured a number of smaller concepts into IPOs. Check out some of these examples:
Noodles & Co., which went public in 2013 and more than doubled in value on its first day, closed nearly 10% of its locations last year, overhauled management and is trading in the mid-single digits.
So is Potbelly Corp., which is facing investor pressure to explore a sale. It went public and doubled in value in 2013.
Habit Restaurants similarly skyrocketed in value after its 2014 IPO, but has seen that valuation decline ever since.
Papa Murphy’s, which went public in 2014, has had to overhaul management amid sales challenges and has faced its own activist investor pressure. It, too, is trading in the mid-single digits.
In Fogo’s case, the decline made it tougher for its private-equity sponsor, Thomas H. Lee Partners, to exit its investment. Nearly three years later, the firm still owned a controlling, 60% position. It clearly wanted to sell its stock.
Outside of a brief period a year ago, Fogo had been trading within a relatively tight range since 2016, between $12 and $14 a share. Rhone's acquisition at $15.75 per share was well above that range and gave Fogo an acquisition multiple of about 11 times earnings before interest, taxes, depreciation and amortization.
To be sure, the presence of a controlling private-equity shareholder interested in an exit simplified matters, while providing an incentive for the company to seek a buyer.
But just like Arby’s acquisition of Buffalo Wild Wings, the Fogo deal demonstrates that the market is now ripe for go-private deals. Private-equity groups are willing to pay higher prices for many chains than Wall Street is willing to give.
Other companies that have struggled to win investor favor could look at these valuations and opt to sell out.
Not all companies will find buyers, of course—companies such as Fiesta Restaurant Group, the owner of Pollo Tropical and Taco Cabana, as well as Bravo Brio Restaurant Group, struggled to find buyers last year. Just because a company is for sale doesn’t mean someone will step up and make a purchase.
But the availability of better valuations on the private market could prove too much for many companies to resist.
In addition, it seems less likely that restaurant chains will seek financing through a traditional IPO, outside of the Regulation A+ “mini IPOs” that were all the rage in recent months.
If Wall Street isn’t giving out high multiples, what’s the point in going through the cost and trouble of being a public company?