I doubt I’ll ever forget the first time I ate at a Bojangles.
I was at the airport in Charlotte, N.C., on my way to New York to see my family. I was exhausted and hungry. And, as it turns out, Bojangles’ country-fried steak on a biscuit was exactly what I needed to get through the long day of travel.
I’m certainly not alone. Bojangles is one of the hottest companies in the fast food industry. And the company’s pending initial public offering is sure to be one hot fast food IPO.
While we don’t know exactly when Bojangles will begin trading publicly, we know that the day is rapidly approaching. The company filed its S-1 – the final filing and investment prospectus leading up to an IPO – two weeks ago. It generally takes 10 to 12 weeks from S-1 filing to IPO, so I would expect the company to begin trading – under the Nasdaq ticker symbol BOJA – sometime in June or July.
There’s just one problem…
Bojangles joins a growing list of recent IPOs that are set up to give existing investors a way to get out of their investment.
Known for its “famous chicken n’ biscuits,” Bojangles was founded in 1977 in Charlotte. Today, the company has 622 restaurant locations in 10 states plus Washington, D.C. This means that the company is extremely concentrated in one region and there is still considerable opportunity for it to grow in the U.S. fast food market.
The company reported $430 million in sales during 2014, up 14% from 2013. Net income was $26 million. Though this is a mere 7% increase over 2013, net income rose more than 215% from 2012 to 2013.
With a target of 7% to 8% for growing its locations and solid numbers all around, there is a lot to like about this fast food IPO.
But there are also a few things that I don’t like about this IPO. And they happen to be pretty significant.
Let’s start with the IPO structure itself.
“We will not receive any proceeds from the sale of shares in this offering,” the company discloses in its S-1 filing. That means that when you’re buying into this IPO you’re buying your shares from early investors and company insiders who want to sell some of their shares to you.
I don’t like that. If the investment opportunity is so great, why do they want to sell out of it to let you in?
What’s more, these early investors and company insiders have extracted $100 million from the company over the past two years. Meanwhile, the company has only $13.2 million in cash and $252.8 million in debt.
It gets better. When you buy shares of Bojangles you won’t be buying shares of an independent company. Rather, you’ll be buying shares of a company that is majority-owned and controlled by private equity firm Advent International.
To be frank, I have little doubt that this will be a popular IPO, pricing at the top of its range and spiking higher on its first day of trading. Why? Because that’s how all of the other suspicious IPOs have performed in the last couple months.
I find this trend to be alarming.
GoDaddy (NASDAQ: GDDY) and Virtu Financial (NASDAQ: VIRT) are two recent IPOs where almost none of the proceeds went to the company. Rather, they went toward buying out existing investors.
You’re the private equity owner of Bojangles. You pull $50 million out of the company in 2013 and do it again in 2014. Meanwhile, the company earned around $25 million each year and you’re trying to fund a 7% to 8% expansion. How do you do it? With debt, of course. $252.8 million of it.
Now it’s time to cash out some of your shares. How do you do it? Sell them to the public in an IPO, of course!
As I said above, I have no doubt that the Bojangles IPO will be a hot fast food IPO. But I also have no doubt that this is ultimately a bad deal for individual investors like us.
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