IPO Preview: Papa Murphy's Holdings

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 |  About: Papa Murphy's Holdings, Inc. (FRSH)
by: IPOdesktop

Summary

Three financial metrics declined for 2013 vs. 2012: operating income percentage of revenue, cash flow percentage of revenue, and EBITDA percentage of revenue.

Formed in 1981, it looks like FRSH has maxed out its growth potential in the U.S., with 1327 domestic franchisees.

Lost money the last three years, although adjusting for early debt retirement costs, FRSH showed a marginal profit for 2012 and 2013.

Per share dilution to IPO investors is -$20.21, which is high relative to the mid-range price of $12.

Price-to-tangible book value is -1.5, which is very low and generally happens when private equity owners have sucked out as much cash as possible to pay themselves dividends.

Based in Vancouver, WA, Papa Murphy's Holdings (NASDAQ:FRSH) scheduled a $70 million IPO on the Nasdaq, with a market capitalization of $204 million, at a price range midpoint of $12 for Friday, May 2, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint Managers: Jefferies & Co., Baird, Wells Fargo Securities

Co-Managers: William Blair Co., Raymond James, Stephens Inc.

End of lockup (180 days): Wednesday, October 29, 2014

End of 25-day quiet period: Tuesday, May 27, 2014

Summary
FRSH is a pizza chain that also allows customers to take pizzas home for baking. FRSH has positive operating earnings from its franchise operations, but has operating losses from its company-owned stores.

Formed in 1981, it looks like FRSH has maxed out its growth potential in the US, with 1327 domestic franchisees.

System-wide comparable store growth was only 2.8% in 2013 vs. 2012. The company has lost money the last three years, although adjusting for early debt retirement costs, FRSH showed a marginal profit for 2012 and 2013.

The per-share dilution to IPO investors is -$20.21, which is high relative to the mid-range price of $12. FRSH's price-to-tangible book value is -1.5, which is very low and generally happens when private equity owners have sucked out as much cash as possible to pay themselves dividends.

Three financial metrics declined for 2013 vs. 2012: operating income percentage of revenue, cash flow percentage of revenue, and EBITDA percentage of revenue.

Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Papa Murphy's Holdings

$204

2.5

-78.5

2.2

-1.5

34%

P/E Adj. for loss on early debt retirement

142

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Conclusion
Neutral to negative

To put the conclusions and observations in context, the following is reorganized, edited, and summarized from the full S-1 referenced above.

Business

FRSH is a high-growth franchisor and operator of the largest Take 'N' Bake pizza chain in the United States. Take 'N' Bake pizza restaurants sell uncooked pizzas that customers bake at home.

FRSH was founded in 1981, and has grown its footprint to a total of 1,418 franchise and company-owned stores (collectively "system-wide stores") as of December 30, 2013, more than 20 times the stores of its nearest Take 'N' Bake pizza restaurant competitor. The Papa Murphy's experience is different from traditional pizza restaurants. FRSH's customers:

CREATE their fresh, customized pizza with high-quality ingredients in its stores or online;

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TAKE their fresh pizza home; and

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BAKE their pizza fresh in their ovens, at their convenience, for a home-cooked meal served hot.

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FRSH has been repeatedly rated the #1 pizza chain in the United States by multiple third-party consumer studies.

In 2014, 2013, 2012, and 2011, FRSH was rated the #1 pizza chain overall by Nation's Restaurant News, and in 2012, 2011, and 2010, FRSH was rated the #1 pizza chain by Zagat.

Compared to broader restaurant chain competition, FRSH was also recognized by Technomic in 2013 as the #1 chain overall among all restaurants and all food categories, by Nation's Restaurant News in 2013 and 2012 as one of the Top 5 Overall limited service restaurant chains across all food categories, and by Zagat in 2012 as one of the Top 5 Overall fast food chains across all food categories.

For fiscal years 2013 and 2012, FRSH had total revenues of $80.5 million and $66.9 million, respectively, net loss of $(2.6) million and $(2.1) million, respectively, and Adjusted EBITDA of $24.4 million and $22.1 million, respectively.

FRSH believes its leading consumer ratings are due to the broad appeal of its concept. However, FRSH actively targets mothers and families looking to solve the "dinnertime dilemma" of providing their family with a high-quality, home-cooked meal without investing significant time or money.

Dividend Policy

No dividends are planned are planned on common stock.

Intellectual Property

FRSH regards the Papa Murphy's brand name and associated trademarks as valuable assets. FRSH has a portfolio of 24 trademarks registered, and several pending trademark registrations with the United States Patent and Trademark Office.

FRSH has also secured trademark registrations for its brand name in Canada, Mexico, New Zealand, and Australia, and has applied for trademark registrations in several Middle Eastern countries, as well as for a community mark in the United Kingdom. All of the marks owned by FRSH cover store-related services and/or food products.

Competition
Take 'N' Bake
plus traditional pizza chains such as: Papa John's (NASDAQ:PZZA), Pizza Hut (NYSE:YUM), Domino's (NYSE:DPZ), Little Caesars.

5% stockholders

Lee Equity 61.7%

Thrivent White Rose Fund 13.1%

AI PM Holdings LP 8.8%

Use of proceeds

FRSH expects to net $62 million from its IPO. Proceeds are allocated as follows: to repay $60.4 million in aggregate principal amount of indebtedness under its new senior secured credit facilities, to pay a $1.5 million termination fee associated with its advisory services and monitoring agreement with Lee Equity and to use the remainder for general corporate purposes.

FRSH's new senior secured credit facilities bear interest at a variable interest rate of LIBOR plus 5.75%, as calculated pursuant to the agreement governing its new senior secured credit facilities, and mature on October 25, 2018.

Disclaimer: This FRSH IPO report is based on a reading and analysis of FRSH's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.