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Carl's Jr. owner CKE delays IPO

Analysts say investors balked at the firm's debt load and poor growth prospects.

August 11, 2012|Tiffany Hsu
  • Fast-food company CKE, owner of Carl's Jr. and Hardee's, postponed plans to go public, citing market conditions. Above, a Carl's Jr. restaurant at 3005 W. 6th St. in Los Angeles.
Fast-food company CKE, owner of Carl's Jr. and Hardee's, postponed… (Al Seib, Los Angeles Times )

CKE Inc. scrapped plans to take the Carl's Jr. and Hardee's operator public this week as investors balked at the poor timing, shaky financials and harsh head winds against the fast-food industry.

The fast-food chain, which started as a hot dog stand 71 years ago in Los Angeles, was unable to persuade investors to buy into its initial public offering of stock. CKE postponed the deal at the last minute Thursday night, citing market conditions.

But analysts said the biggest reason CKE put off the IPO was that owner Apollo Management made a series of miscalculations that scared off investors.

Critics said CKE, loaded with $1.5 billion in debt, was just not ready to go public.

"Apollo milked it and destroyed the balance sheet, as is typical of private equity firms," said Francis Gaskins, editor of IPOdesktop .com in Marina del Rey. "It then takes a while for the company to work itself back into profitability, and Apollo didn't have enough time with CKE."

For The Record
Los Angeles Times Thursday, August 23, 2012 Home Edition Main News Part A Page 4 News Desk 1 inches; 61 words Type of Material: Correction
CKE IPO: An article in the Aug. 11 Business section about a planned initial public offering by Carl's Jr. owner CKE Inc. said that the company had stopped matching 401(k) contributions and that it had $1.5 billion in debt. CKE never matched employee retirement contributions, and it had $715 million in debt that was part of $1.5 billion in total liabilities.

This would have been the second time that CKE had gone public after founder Carl Karcher listed the company's shares in a well-received IPO in 1981.

This time around, the Carpinteria fast-food giant is a drastically different company. Apollo bought CKE and took it private two years ago for $700 million, then began taking on massive amounts of debt.

Much of the money Apollo would have raised in the IPO was expected to pay down junk bonds that the firm used to acquire CKE. The company had expected to raise $200 million during the IPO, and Apollo would have remained its biggest shareholder.

In addition, Apollo paid itself $190 million in dividends from CKE last year, according to regulatory filings. That includes $13.8 million that CKE would hand over to Apollo to end a management services agreement.

The scenario is typical for private equity firms, which use debt to pay themselves earlier and then cash in again after an IPO. Most private equity takeover teams wait four or five years before releasing companies onto the public markets, giving them time to stabilize away from the public eye.

"They used CKE similarly to a credit card," said John A. Gordon, a principal with Pacific Management Consulting Group, which advises restaurants. He said the IPO process was "an embarrassment and a total waste of time for Apollo and CKE."

Another financial factor that weighed on investors is that CKE has not shown an annual profit for two years, and in 2011 suffered a $19.3-million loss. Although sales have grown modestly, much of the company's cash has been used to pay interest on the debts it owes.

CKE, in an effort to cut costs, even stopped paying matching contributions to employees' 401(k) retirement accounts.

"The company's weak financials made the IPO as hard to digest as some of the fast-food it serves," said IPO research firm PrivCo Chief Executive Sam Hamadeh, who added that he had spoken with investment managers who passed on CKE.

Another fumble for Apollo and CKE was the IPO's timing, analysts said.

Early August has always been a slow period for such launches, with much of Wall Street on vacation and the remainder worn out by the debuts that tend to swarm the market earlier in the summer. CKE would have been the fifth restaurant company to go public since June.

The most recent, Outback Steakhouse owner Bloomin' Brands Inc., launched Wednesday. But shrinking demand forced the company to price at $11 a share, below its originally expected $13-to-$15 range, while selling fewer shares than it had hoped.

Both CKE and Apollo planned to offer about 6.7 million shares. After Bloomin' Brands' subdued debut, analysts said investors probably balked at CKE's price range of $14 to $16 a share.

"Investors are so jittery right now that expectations going forward are conservative," said Nick Setyan, a restaurant analyst with Wedbush Securities. "Appetite for these types of IPOs, particularly for these old, mature stalwarts, has gone away."

Indeed, there's heavy competition from younger brands such as Smashburger and Five Guys Burgers and Fries, which have ambitious expansion plans and more buzz.

Although CKE has been pushing its store remodeling efforts and international development, its existing base of more than 3,000 locations makes analysts skeptical that it is capable of a major growth spurt.

CKE has also struggled to distinguish itself in recent years, according to research.

Hardee's and Carl's Jr. are outranked in sales by chains such as Wendy's, Jack in the Box and Dairy Queen, according to QSR magazine.

Carl's market share of the burger segment fell below 2% last year for the first time since at least 2005, compared with Burger King's 12% and McDonald's 49.6%, according to research group Technomic.

"They're average for speed, average for value, average for food quality," said Mark Kotkin, director of survey research for Consumer Reports. "They don't stand out particularly."

It was unknown whether Apollo will revive the IPO at a later date.

But if CKE does list its shares on the New York Stock Exchange, it would be a far cry from the first time the Southern California native debuted publicly in 1981. Back then, a heady sense of optimism pervaded the $15-million-a-year enterprise, said Loren Pannier, who was then serving as chief financial officer.

"We were going from a small little regional chain to something bigger," said Pannier, now a retiree in Newport Beach. "It was like going from the minor leagues to the big leagues."

--

tiffany.hsu@latimes.com

Times staff writer Walter Hamilton contributed to this report.

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