The sale of Pret A Manger to JAB Holding Co. didn’t just give the Luxembourg-based investment firm yet another restaurant chain to add to its collection—it also removed one of the best prospects to end a restaurant IPO dry spell now nearing three years.
Pret had been considering an initial public offering in the U.S. It would have been a good prospect, too, with 530 locations around the world, lots of global growth potential and a hefty presence in New York City, where many IPO investors work.
Instead, it chose to sell a majority stake to JAB, which has bought nearly everything else in recent years.
The story illustrates exactly why companies aren’t going public right now: Recent performance by newly public companies and weak overall industry sales results have reduced what restaurant chains can get in an IPO process, so they can get more through a private sale.
Industry IPOs go through cycles. No restaurant company went public from 2006 through 2010 during a recession and weak industry environment.
Bravo Brio changed that in 2010. In the next five years, a total of 17 companies went public.
From 2013 through 2015, in fact, investors couldn’t get enough of the restaurant business. Chains such as Noodles & Co., Potbelly, Habit Restaurants and Shake Shack all more than doubled their values on their first day of trading.
The high valuations had a ripple effect throughout the industry. Private-equity firms called restaurants with as few as one unit in the hope of finding the next big thing, and valuations skyrocketed.
But many of these companies also struggled. Wall Street investors, who demand consistent performance, were quickly turned off and many chains have since seen their valuations plunge.
Of the 17 companies that went public from 2010 through 2015, only seven are currently trading above their original IPO price.
The median change for those companies has been a decline of 21%.
(Chains have gone public through other means, including smaller Regulation A+ IPOs, reverse mergers and spinoffs, and Freshii went public in Canada, but we looked only at companies that went public through a traditional IPO in the U.S.)
Three of the 17 companies that went public over that period have since gone private:
Bravo Brio was sold last week for $4.05 per share, or 71% lower than its IPO price after years of struggles.
Fogo de Chao was sold earlier this year for a price 21% lower than its IPO.
Ignite Restaurant Group, the owner of Joe’s Crab Shack, filed for bankruptcy protection and was sold to Landry’s. It went public in 2012 for $14 a share. It was sold for less than the value of its loans, meaning its lenders received all the proceeds.
To be sure, a few companies have performed well for investors since their IPOs, including powerhouse Dunkin’ Brands, Shake Shack, Wingstop, Dave & Buster’s, Chuy’s and Bloomin’ Brands.
Of those, only Wingstop, Shake Shack and Chuy’s could be considered younger growth chains.
But a majority of the companies have struggled since their offerings, and several have lost at least half of their value. The sales performance and potential closures at Zoes aren’t likely to change many investors’ minds.
Meanwhile, industry sales have struggled, and fast-casual chains that have dominated the recent IPO market have been among the weakest. There is a growing sense among public investors that the industry is overstored, making them less receptive to another restaurant IPO.
If investors aren’t handing out strong valuations, there’s little sense in companies going through a traditional IPO. The process is too expensive and complex, and investors are too focused on short-term results over long-term investments.
Meanwhile, some private-equity investors with long-term time horizons are willing to pay relatively high prices for chains that are put up for sale. That includes JAB, which has paid high prices for Panera Bread, Krispy Kreme and Peet’s Coffee, and was willing to pay nearly $2 billion for Pret.
To be sure, good restaurant companies can go public in any environment. But as long as buyers are willing to pay top dollar for good chains and public investors remain skittish about the industry, don’t hold your breath for an industry offering anytime soon.
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