Sunday, January 29, 2012

They Don't Always Ring a Bell at the Top But They Sure Eat a Lot of Steak

Here's the thing about IPOs. They are about supply and demand. Yeah, sure, access to "permanent" capital, "liquidity events" for the founders and the Mitt Romneys, recapitalizations, and so on, but, fundamentally, they are about supply and demand. Offer too much stock, and it might be a flop (see GRPN's "float" in their I"P"O). Generate robust demand, and it might pop. But by the time a company gets to that stage, it has been scrubbed, polished, shopped and priced to perfection (which is why Uncle Warren does not play the game). Demand comes in cycles, and high beta companies usually go public later as they need to show a good upswing in results.

The Facebook IPO filing hogged all the attention this week, but what caught my eye was Del Frisco's, a steakhouse chain, filing an S-1 for a $100 million IPO. Uncle Lehman (now trying to pay off his creditors) has bought me meals in the Del Frisco's across the street. Great place.

But what does it indicate about "the cycle"? Steakhouses are "expense account" locations: business lunches, deal closing dinners, awards banquets, top sales teams doing the single-malt tasting menu, you name it. It is all "high beta" spending, and it all (or nearly all) goes away when the purses tighten.

What does history show? Let's look at the comps.

Morton's (MRT), a larger steakhouse chain, went public in early 2006 in the $16-$17 range, just as the national housing prices peaked. Do you remember 2006? The housing bubble was in full swing, everyone made "product", from the mortgage broker to the securitization machine, and the times were good, and the purses were loose. MRT then went on to drop to the $1.60-$1.70 range in early 2009. This is a 90% loss for the IPO buyers who held. The company was just taken private at $6.90/share but at least you can enjoy their internet-only NYC surf-and-turf three-course special at $109.99 for 2 through March.

Ruth's Chris (RUTH), also larger than Del Frisco's, went public in the summer of 2005 above the initial range, at $18/share. The IPO was in the $200 million range. RUTH tanked to $0.75 or something in early 2009, so call it a 95% loss for an IPO-price buyer. The stock is currently in the $6 range. Their Midtown location is running a $44.95 filet-and-lobster tail special for Valentine's Day, so get with the program (and do not take her to White Castle's Valentine Day specials, seriously).

But the icing on the cake is... Del Frisco's themselves. They filed their first ever S-1 on October 23, 2007, barely 12 days after the S&P500 index reached its all-time high of 1,530. The registration was withdrawn in December 2008. No, I am not making it up, and, yes, the irony is juicier than anything you can pick out from their menu.

They don't ring a bell at the top but they do eat a lot of steak.

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