Posted Tuesday, Jul. 24, 2012
By Mitchell Schnurman
mschnurman@star-telegram
With its thick steaks and rich interiors, Del Frisco’s Double Eagle Steakhouse feels like a throwback to better days, like before the Great Recession. Its IPO makes me nostalgic, too – for the time when public offerings were an important way to fuel growth.
Del Frisco's, based in Southlake, plans to raise about $100 million by selling about a third of its shares to the public, maybe as soon as this week. But only $4 million of the proceeds will go to working capital and general corporate purposes – hardly much of a haul for an expansion-minded operation.
Almost half the money is headed to the private equity owners, Lone Star Funds. (They would get more, about $56 million, if the underwriters exercise their over-allotment option.)
That leaves $50 million from the IPO to go to paying off debt, which isn’t just prudent -- it’s required by the lenders. They set that rule at Del Frisco’s in 2007, after Lone Star bought the company and took out a $110 million loan.
Prior to that, the restaurant had no long-term term debt and practically no interest payments. In the five years after the buyout, the company paid an average of $10 million annually in interest, and another $3 million a year in fees to Lone Star.
That may explain why the company’s net income last year was $5 million lower than before the buyout. And don’t blame the recession: Over the same time, the company grew annual revenue by almost $60 million and added 10 restaurants – three more Del Frisco’s, three more Sullivan’s, and four of its new concept,
Del Frisco’s Grille.
This story may sound familiar: Private equity firm buys a company, piles on debt, grows the revenue, takes it public and uses the proceeds to pay itself and the lenders. Along the way, it also captures some hefty payments.
Maybe investors are skeptical of this formula, too. Lone Star tried to float a similar
IPO in 2007 and had to pull it when the economy soured. The 2012 version was first filed in January, but it wasn’t priced and updated until mid-July, and was amended again this morning.
Last week, when the IPO story appeared in the
Star-Telegram, one commenter noted that there wasn’t much money for restaurant expansion and added: “What is in this for a potential stockholder?”
It’s the right question, and the company reported some impressive growth and margins in its prospectus. Del Frisco’s same-store sales have grown for eight consecutive quarters, for instance, and it wants to expand by adding its lower-priced siblings nearby.
Some may also take comfort in the fact that Lone Star would still hold two-thirds of the shares after the offering. To make a good return, the company will have to perform and lift the stock price.
But there’s risk in that structure, because the private equity firm controls Del Frisco’s and can act in a way that benefits itself, even if it harms other shareholders. That risk is covered in detail in the offer.
Lone Star paid about $600 million in December 2006 to buy a restaurant company that included Del Frisco’s and a casual dining chain. It split the operations and is trying to cash in on the upscale brand.
The average Del Frisco ticket is $100, with a third in alcohol, and the nine restaurants bring in an annual average of $12.5 million each. But the New York location distorts the numbers, because it’s the highest-grossing steakhouse in the country, according to the company. By my calculations, New York does four times the average revenue of the others.
Fort Worth gets a mention in the offering. Last year, Del Frisco's sold the land and buildings for its restaurants in Fort Worth and Denver, and agreed to lease them back for 15 years. It netted millions by trading a valuable asset today for tomorrow’s rent.
What happened to the money? Del Frisco’s spent $10.4 million to pay down debt.
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