Thursday, May 5, 2011

Carlyle & Co. Dippin' on Dunkin'

The Carlyle Group, Thomas H. Lee Partners and Bain Capital will dip on Dunkin' Brands at least three ways.  First, sponsors charge a $3 million annual management fee, a common move for private equity underwriters (PEU's).  Five years of management fees comes to $15 million.  The S-1 speaks to this arrangement ending:

In connection with this offering, the management agreement will be terminated in exchange for a payment to the Management Companies of approximately $14 million.
That brings management fee milking to $29 million, or nearly $10 million per PEU..

Second, Dunkin' executed a "debt for dividend" move at the end of 2010.  It borrowed $1.95 billion, before paying sponsors a $500 million dividend.  Lastly, Carlyle & Co. will monetize a portion of their equity via a $400 million independent public offering (IPO). The S-1 is silent on the number of shares to be sold or the offering price.

As for being a shrewd PEU operator, they know how to load up a company with debt.  Dunkin' Brands has $2.8 billion in long term debt.  Carlyle & Co. purchased Dunkin' in 2006.  Their domestic track record for Dunkin' Donuts same store sales looks like:

Baskin Robbins (BR) domestic same stores sales is abysmal, only turning positive in the last year.  But pay no attention to those numbers.  Pony up for the IPO sweepstakes:

BR is helped by their contracts with the U.S. military, where they take ice cream money from soldiers.

We have contracts with the U.S. military, including with the Army & Air Force Exchange Service and the Navy Exchange Service Command. These military contracts are predominantly between the U.S. military and Baskin-Robbins. We derive revenue from the arrangements provided for under these contracts mainly through the sale of ice cream to the U.S. military (rather than through royalties) for resale on base locations and in field operations. While revenues derived from arrangements with the U.S. military represented less than 2% of our total revenues and less than 6% of our international revenues for 2010, because these contracts are non-exclusive and cancellable with minimal notice and have no minimum purchase requirements, revenues attributable to these contracts may vary significantly year to year. Any changes in the U.S. military’s domestic or international needs, or a decision by the U.S. military to use a different supplier, could result in lower revenues for us.

Financial statements indicate Class L shares of stock consistently had huge earnings per share, while Class A shares showed losses.  Class L holders got the special $500 million dividend:

Dividends paid on Class L common stock (December 2010)--$500,002 (in thousands)

Class L will be converted to Class A in the deal, thus investors should not expect any PEU sized payouts.  A sign of the times is "get theirs and go."

Consider a former Carlyle CaterAir board member, who hawked Dunkin' as President.

It has little to do with goodwill, the non-financial version.  The other goodwill should balloon in the deal.

Update 7-11-11:  PEU's expect to raise $460 million in Dunkin's IPO.