Thursday, June 30, 2011

Dunkin' IPO Pricing: Premium or Discount?

Dunkin' Donuts IPO could get a price range next week, after which the company will begin its investor presentation tour.  Private equity underwriters (PEU's)  Carlyle Group, Bain Capital and Thomas H.Lee Partners own Dunkin'.  They are selling a fraction of their shares inn hopes of raising $400 million.

Ironically, a Dunkin' parent may soon go public.  The Carlyle Group's IPO is expected to follow Dunkin's.   Dunkin' is the latest in a long line of Carlyle monetizations.

Dunkin's revised S-1 addressed a recent tax loss.  One might expect this to be an IPO blemish.  Not so, as private equity underwriters (PEU's) hate paying taxes.

Net income for fiscal year 2010 included a $62.0 million pre-tax loss on debt extinguishment primarily associated with our November 2010 refinancing transaction
Did that qualify for an Obama stimulus tax break for firms buying back debt for pennies on the dollar?

PEU's milked Dunkin' for $3 million a year in management fees:

The Company is charged an annual management fee by the Sponsors of $1.0 million per Sponsor, payable in quarterly installments. The Company recognized $3.0 million of expense per year during fiscal years 2010, 2009, and 2008 related to Sponsor management fees, which is included in general and administrative expenses, net in the consolidated statements of operations. At December 25, 2010 and December 26, 2009, the Company had $500 thousand of prepaid management fees to the Sponsors, which were recorded in prepaid expenses and other current assets in the consolidated balance sheets.
Carlyle, Bain or Thomas Lee investment funds may hold Dunkin' debt:

At December 25, 2010, certain affiliates of the Sponsors held $70.6 million of term loans, net of original issue discount, issued under the Company’s senior credit facility. The terms of these loans are identical to all other term loans issued to lenders in the senior credit facility.
While the loan terms are the same as other investors, what price did sponsor affiliates pay for Dunkin's debt. Was it pennies on the dollar?  Sponsors can retire debt owned by their investment funds.  Profits from cheap debt retirement could be a second ringing of the register in Carlyle's profit-palooza.

This is an interesting PEU disclaimer:

Our Sponsors have a controlling interest in our Company as well as several other entities. The existence of such common ownership and management control within business and other transactions could result in differences within our operating results or financial position than if the entities were autonomous. There have been no significant transactions with companies under common control during the periods presented.

In March 2006, we entered into an investor agreement with the Sponsors and also entered into a registration rights and coordination agreement with certain shareholders, including the Sponsors. Pursuant to these agreements, subject to certain exceptions and conditions, our Sponsors may require us to register their shares of common stock under the Securities Act, and they will have the right to participate in certain future registrations of securities by us.

Other noteworthy revelations include:

1.  Dunkin's filing addressed lawsuits against franchise holders, a source of $4.3 to $12.3 million in contingent liabilities.

2.  It also charges corporate overhead to its advertising funds:

To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, which amounted to $1.5million and $1.4 million for the three months ended March 26, 2011 and March 27, 2010, respectively. Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net.
3.  Sponsors know the value of management fee cash flow, given Dunkin's prepaid such fees:

At March 26, 2011 and December 25, 2010, the Company had $500 thousand of prepaid management fees to the Sponsors, which were recorded in prepaid expenses and other current assets in the consolidated balance sheets.
4.  The management fee will be terminated for $14 million.  Sponsors will get money for five years of service not provided, yet this cash handoff will reduce Dunkin's tax liability.  Did I mention PEU's hate paying taxes?

Get your Dunkin' shopping cart and head to the IPO aisle.   You may have to wait for the price.

Update 7-1-11:  Dunkin's IPO may raise $500 million vs. $400 million, a 25% increase in proceeds.  It's not clear if this prospect is due to better pricing, more shares or puffery.

Update 11-2-11:  Carlyle and company charged Dunkin Brands for terminating their management fee. "In connection with the completion of the initial public offering in August 2011, the Company incurred an expense of approximately $14.7 million related to the termination of the Sponsor management agreement."