I should know better by now: Take everything reported about the valuation of a restaurant chain in one of the major, mainstream publications with a great, big, giant grain of salt.
Jersey Mike’s, the fast-growing sandwich chain, went public on Thursday. And the result was the worst, first-day performances of an industry IPO in decades. As my colleague Lisa Jennings reported, its stock fell 6% on the first day of trading. That is rare. And it is generally speaking not very good.
Since 2011, 25 restaurant chains, other than Jersey Mike’s, have gone public. Only one, Del Frisco’s in 2012, saw its stock price decline on its first day, and Jersey Mike’s decline was worse.
The typical restaurant company to go public saw an increase of 37% on its first day. So Jersey Mike’s 6% decline — the worst performance over that period — was 43 percentage points worse than average.
In the IPO world, Jersey Mike’s 6% decline is an embarrassment. IPOs are typically engineered to generate a first-day “pop,” in which a company’s stock proves popular, the valuation takes off, providing a stronger share price that existing owners can use for their inevitable exit. The most notable offerings always have a first-day pop.
To be sure, the first day matters as much as one day of trading. Most of those 25 companies have gone onto things that didn’t quite match those first-day expectations. So in a sense, maybe the investment bankers did Jersey Mike’s a favor by tempering investors’ expectations from the outset.
But, roughly everything we’ve heard about Jersey Mike’s over the past two years has turned out to be inflated.
Before we move on, we should first provide a lesson in the IPO and M&A media relationship. Investment bankers frequently tip major financial media with stories on upcoming deals to generate interest. They do this in part to generate interest in the chain’s sale or its IPO. And the result frequently comes with inflated valuations.
Few such stories we’ve been involved in, however, match the level of inflation that has come with the Jersey Mike’s sale and then its IPO.
Earlier this week, for instance, Bloomberg reported that the offering was “10 times oversubscribed.”
That effectively means that people were barging down the door for a chance to buy stock in the sandwich chain before it was made available to the general public. We took that on its face value as an indication that the chain would blow past its initial projection of a $1 billion fundraise. We should have been more skeptical, apparently.
But Jersey Mike’s made no move before Wednesday to increase the $21 to $25 price for its shares on its IPO, and then when it went public it priced at the middle of that range, $23. That was fine. But it certainly didn’t match the pre-IPO hype. If the IPO was in such demand, Jersey Mike's would have raised the price far higher than $23.
Rather than fending off intense demand from IPO investors, bankers according to multiple sources went looking for investors in the offering.
That continues a track record of exaggeration when it comes to Jersey Mike’s, specifically.
When Blackstone bought the company nearly two years ago, reports suggested that the chain had a valuation of $8 billion. It didn’t. Blackstone, the private-equity firm, bought the company at a valuation of $6.3 billion, according to SEC documents. Add in the earnout provision included in the acquisition and the valuation was $6.55 billion. That, last we checked, is less than $8 billion.
And then, when reports first emerged that it was considering an IPO, valuation expectations were placed at an ungodly $12 billion.
Here’s the thing: Jersey Mike’s valuation on its IPO was $7.3 billion, though that is diminished somewhat by the first-day decline. It still represents an increase in the value it sold for 18 months ago.
And $6.6 billion sale price for a fast-casual chain with 3,300 units is hardly a bad thing. But all this hype and valuation inflation made demand seem far more intense than it ever was.
None of this should take away from Jersey Mike’s the company. It still is a high-quality restaurant chain with strong unit economics, a powerful franchisee base and plenty of growth in the future.
But the weak performance of the IPO may well discourage more companies from going public. And ultimately that would be a bad thing.