Dunkin' Looks to be Another Private Equity-Backed IPO Success

| About: Dunkin' Brands (DNKN)
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Dunkin’ Brands Group, Inc. (NASDAQ:DNKN) priced its IPO of 22.25 million shares at $19.00, above the indicated range of $16.00-18.00. All of the shares offered are primary or company shares. At the $19.00 price, the market capitalization will be approximately $2.4 billion. The company plans to use the proceeds, together with an additional $100M of term loan borrowings and available cash, to repay its existing 9 5/8% senior notes due 2018. Lead underwriters for the offering are JP Morgan, Barclays, Morgan Stanley, BofA Merrill Lynch, and Goldman.
Dunkin’ Brands is owned by private equity companies Bain Capital, the Carlyle Group, and THL Partners, none of which are selling on the offering. While close to a quarter of the U.S. IPOs this year have been private equity-backed deals, Dunkin’ Brands is arguably the highest profile name to come through since the number of private equity backed offerings consumed the IPO market in the first quarter of 2011.
Dunkin’ Brands is a leading quick service restaurant operator with two well-known worldwide brands in Dunkin’ Donuts and Baskin Robbins. The company has over 16,000 global locations, which are almost all franchised locations, and trailing 12 month franchisee reported sales were $7.7B. Both of its brands have 95% brand awareness in the U.S., while Baskin Robbins is in the #1 hard-serve ice cream position in the U.S., and Dunkin Donuts has the #1 position in hot/regular/flavored/decaf coffee, iced coffee, donuts, bagels, and muffins. Dunkin Donuts operates in 36 U.S. states and 31 other countries, while Baskin Robbins operates in 45 U.S. states and 46 other countries.
The Dunkin’ Donuts brand represents approximately 60% of the total units, with 9,805 worldwide and trailing 12 month ending March 31 franchise sales of $6.07 billion. Of the 9,805 Dunkin’ Donuts units, approximately 68.5% are located in the U.S., with the majority of the concentration in its core northeastern and eastern markets. The company believes it has the opportunity to grow U.S. presence with Dunkin’ Donuts to approximately 15,000 units, with the primary focus east of the Mississippi for the next five years, and then moving west thereafter. Dunkin’ added 206 new stores in 2010 and 90% of this new development was with existing franchisees.
Baskin Robbins represents approximately 40% of total franchise sales. Unlike Dunkin’ Donuts, most of the growth from Baskin Robbins has come from international growth. International franchisee sales represented approximately 70% of the $1.66 billion of total sales for the brand. The brand boasted the number one position in the fast food ice cream category in both Japan and South Korea for 2010. While growth in the U.S. has been meager for the last decade, the current management team looks to continue to re-energize the brand in the U.S. after a period of what it describes as the brand being ignored for almost 20 years.
Dunkin’ Brands is among the largest U.S. QSR companies overseas by unit count. From 2007 to 2010, international same store sales increased by a 13% CAGR, and the number of international units by a 9% CAGR. The company has 450-500 net openings planned internationally for 2011. Growth is being driven by existing markets (Japan, Korea, and the Middle East) and emerging markets (China, Russia, and Latin America).
Dunkin’ Brands operates almost completely under a franchisee model, rather than with company-owned stores. The result is that it had the highest operating income margin of the peer group for 2010 of 40%. This compares to the next closest peers such as McDonalds (NYSE:MCD) with 31%, Tim Horton’s (THI), Yum brands (NYSE:YUM) with 16%, Chipotle (NYSE:CMG) with 16%, Dominos (NYSE:DPZ) with 15%, and Starbucks (NASDAQ:SBUX) with 14%. The company has a target of 6-8% long term revenue growth and 15%+ EPS growth. Total franchise reported sales have grown at an 8.7% CAGR from ’01 to '10 with the Dunkin’ Donuts brand, and at a 6.8% CAGR with the Baskin Robbins brand.
The offering was multiple times oversubscribed and closed to orders on Monday this week. The offering represents two key ingredients for investors: Brand recognition (as both brands have over 95% brand awareness in the U.S.) and growth (while Dunkin’ Donuts may be on every corner in the northeast, it has plenty of room to grow in the southeast and west, along with international expansion for both brands). Investors appear to be drinkin' the Dunkin’ coffee on this offering and we expect that this will have a solid day one debut.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DNKN over the next 72 hours.