Seeking Alpha
, IPOpremium (848 clicks)
Value, IPOs, long only
Profile| Send Message|
( followers)  

Based in Canton, Massachusetts, Dunkin' Brands Group (proposed symbol DNKN) has scheduled a $383 million IPO with a market capitalization of $2.15 billion at a price range mid-point of $17 for Wednesday, July 27. The full IPO calendar for the week of July 25 includes 12 IPOs scheduled to raise $2 billion.

OBSERVATIONS

DNKN is a franchisor with a weak balance sheet (price to tangible book value is -1.2, about as low as we’ve seen), because the balance sheet has been stripped of cash by private equity shareholders. For example, just last November shareholders borrowed more and paid themselves $500 million. Sales for the March 2011 quarter were up only 9% from the year earlier quarter and DNKN showed a loss of $1.7 million for the March 2011 quarter. Adding back a non-recurring finance charge and applying a 43% tax rate (which includes Massachusetts state corporate tax), DNKN earned $5.3 million for the March quarter. Effects of the highly leveraged balance sheet show also up in the income statement: 75% of operating earnings went to pay interest in the March 2011 quarter.

CONCLUSION

DNKN appears to be fully priced at the price range mid-point of $17. Further adjusting the March quarter results by the annual interest savings from IPO debt repayment, DNKN would have earned around $10 million for the March quarter, which is an annual rate of $40 million. At a $2.15 billion market capitalization the associated price-to-earnings ratio is 54 (2150/40), still very high for a low growth, mature business with only a 5% after-tax margin.

VALUATION

DNKN generated annual system growth since 2008 of only 5%, including 5.4% for the March 2011 quarter. Because DNKN showed a loss for the March quarter, we compared DNKN's calendar 2010 sales and earnings with 2010 sales and earnings for McDonald's (NYSE:MCD), Starbucks (NASDAQ:SBUX) Tim Hortons (NYSE:THI) and Wendy’s (NASDAQ:WEN). The respective price-to-sales ratios are 3.7 for DNKN and for the rest, respectively, 3.7, 2.7 3.1 and 0.7.

The price-to-earnings ratios for the 12 months ended December 2010 were 80 for DNKN for the rest respectively, 18, 28, 13 and -240. Regarding profit margins, DNKN’s 5% profit margin is 75% less than MCD's 21% profit margin.

Calendar yr 2010 comparisons are used because DNKN showed a March qtr loss

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Profit

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Margin

Dunkin' Brands

$2,149

3.7

80

3.4

-1.2

5%

McDonald's

$89,520

3.7

18

20.1

50.2

21%

Starbucks

$29,860

2.7

28

6.9

7.3

9%

Tim Hortons

$7,910

3.1

13

6.2

6.2

25%

Wendy's

$2,250

0.7

-240

1.0

-30.8

0%

Source: Google Finance

DNKN Valuation Metrics

BUSINESS

DNKN is the world’s leading franchisor of Quick Service Restaurants (“QSRs”) serving hot and cold coffee and baked goods, as well as hard serve ice cream. DNKN franchises restaurants under Dunkin’ Donuts and Baskin-Robbins brands. With over 16,000 points of distribution in 57 countries, the DNKN portfolio has strong brand awareness in key markets around the globe and has industry-leading market share in a number of growing categories of the QSR segment.

Dunkin’ Donuts operates primarily in the breakfast part within the QSR segment of the restaurant industry which has experienced significantly better guest traffic trends than the overall QSR segment in recent years. Dunkin’ Donuts holds the #1 position in the U.S. by servings in each of the QSR subcategories of “Hot regular coffee,” “Iced coffee,” “Donuts,” “Bagels,” and “Muffins,” and holds the #2 position in the U.S. by servings in each of the QSR subcategories of “Total coffee” and “Breakfast sandwiches.”

Baskin-Robbins is the #1 QSR chain in the U.S. for servings of hard serve ice cream and has established leading market positions in Japan as well as in the growing ice cream QSR markets in South Korea and the Middle East.

COMPETITION

Competitors include: 7-Eleven, Burger King, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Starbucks, Subway, Tim Hortons, WaWa and Wendy’s, among others. Additionally, we compete with QSRs, specialty restaurants and other retail concepts for prime restaurant locations and qualified franchisees.

USE OF PROCEEDS

DNKN expects to conjure $384mm from its IPO, not including net proceeds from an additional $100 million of term loan borrowings. The IPO and debt proceeds are allocated to the following to repay all amounts outstanding under the Dunkin’ Brands, Inc. 9 5/8% senior notes due 2018, and to use any remaining net proceeds for working capital and for general corporate purposes. As of April 30, there was $475.0 million in aggregate principal amount of the Dunkin’ Brands, Inc. 9 5/8% senior notes outstanding.

$500 MILLION SHAREHOLDER DIVIDEND

The senior notes issued on November 23, 2010, and proceeds (together with borrowings under Dunkin’ Brands, Inc.’s senior credit facility and cash on hand) were used to repay indebtedness of certain of indirect subsidiaries; to pay a cash dividend of $500.0 million on the outstanding shares of Class L common stock; and to pay related fees and expenses.

Source: IPO Preview: Dunkin' Brands Group