Dunkin Brands Group (DNKN), the franchiser of restaurants catering in coffee, baked goods and ice cream, announced a secondary equity offering of up to 22 million existing shares after the close on Friday. In response to the news, the shares plowed 1.6% lower in after-hours trading.
Dunkin's current shareholders are looking to sell 22 million shares. I would like to point out that this is not the actual company selling shares and receiving the proceeds to make productive investments. It is the current group of shareholders, including the CEO, who would like an exit. If there is sufficient demand for the shares, underwriters have the opportunity to exercise their green shoe clause, selling an additional 3.3 million shares.
Initial public offering
Shares of Dunkin Brands went public in July 2011. The coffee-and-doughnut company sold 22 million new shares for $19, raising some $400 million. The proceeds went to the company in an effort to reduce leverage. The stock had an excellent first day, closing the day up 47% to $27.85, and has continued to rally to $32 as of the time of writing.
In November, the company's current shareholders, which include Bain Capital, the Carlyle Group and Thomas H. Lee Partners, combined sold another 22 million existing shares from the roughly 100 million shares the consortium holds. The new offer for another 22 million shares on Friday marks the continuation of the staged exit plan of the consortium, which will hold about 50 million shares after this secondary offering.
Dunkin currently holds about $1.2 billion in net debt. At the current share price of $32, the company is valued at roughly $3.8 billion or 6.4 times its annual revenue and about 110 times its annual earnings, which obviously implies a steep valuation.
Net margins are depressed as the company has to make its interest payments on the sizable debt position. Operation cash flows are much better though, largely due to the fact that capital expenditures have been cut back to a bare minimum, allowing Dunkin to pay a quarterly dividend of $0.15, providing investors with a 1.9% dividend yield.
I did not like Dunkin from a valuation perspective before the recent news broke, as the valuation multiples are just too steep and the company carries too much debt. The news of the secondary offering, which is actually just a sell out of current shareholders, makes me even more wary as this marks the second offering in just a couple of months.
Furthermore, insiders continue to hold 50 million shares in the company which could provide a lot of selling pressure over the coming months. Investors should avoid picking up shares in the offering, and might actually consider going short.