Wingstop and Fogo de Chao each had an initial public offering within one week of each other in June 2015. There hasn’t been a traditional IPO in the restaurant industry since.
To be sure, multiple companies have gone public through smaller, Regulation A+ offerings, notably Fatburger owner Fat Brands. And Freshii went public last year in Canada. But, for the most part, the traditional IPO spigot has been dry, at least when it comes to restaurants.
It’s a dry spell that is likely to continue, at least for a while, as long as valuations of publicly traded chains are lower than the prices companies can get in a private sale.
Restaurant company IPOs come in waves, far more than they do in many other industries. Dry spells can last for some time. Several companies went public in 2006. And then nobody went public until 2010, when Bravo Brio Restaurant Group broke the logjam.
At least one restaurant company went public every year through 2015, an era that took numerous chains of all sizes public, from Zoes Kitchen through Dave & Buster’s and Bloomin’ Brands.
But concern about sales at many of the companies that went public, including Papa Murphy’s, Noodles & Co., Habit Restaurants and Potbelly, sent their stock prices plunging and reduced demand among the large, institutional investors that tend to drive the IPO market.
The lower demand pushed down the prices these restaurant companies could fetch in an IPO, making it less desirable for companies to raise funds this way. In addition, overall weakness in the restaurant industry pushed down stock prices, which also made an offering less desirable.
Investment bankers have long argued that any company, if it’s good enough, can go public at any time.
But if these good companies can attract higher valuations by selling to private-equity firms or other private investors, then they almost certainly will go that route. What’s the point of going through the cost and hassles of an IPO if you’re not getting a premium valuation?
Indeed, some companies long thought of as IPO candidates, such as Jimmy John’s (which did explore an offering) and Blaze Pizza have instead taken private-equity investors.
What’s more, companies with weak sales are less likely to go public. So, the two-year weakness has likely filtered out some of the companies that might have gone public.
Recently, however, there has appeared to be at least some movement in restaurant stocks. There is also some bullishness on the part of some analysts about industry sales in 2018—with lower taxes potentially providing a catalyst for improving sales.
Better stocks could therefore end the dry spell, providing the returns some companies are seeking.
“If we do start to see some sector momentum, we could see a bounce-back in valuations in the public market,” says Chris Sciortino, a managing director for Robert W. Baird & Co. “That could open up the window for more IPOs. A real high-quality, strong asset, even despite a lack of activity, would be well-received by the institutional investor community.”
More likely, however, is that you’ll get the opposite: Public companies going private. If private-equity groups are paying valuations that are higher than companies are getting by selling stock to the public, more companies could get taken out.
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