Should Restaurants Look To Go Public?
Cheap credit. Hungry investors. Rethinking the restaurant model could give the industry a much needed jolt and possibly even save it. Using a SPAC could be just the answer.
By Jamie Mah @grahammah
It hasn’t been an easy year for the restaurant and bar industry to say the least. This pandemic has exposed its many flaws in brutal fashion. Lockdowns, limited seating, added PPE precautions and dependance on third part delivery apps are just some of the issues restaurateurs have had to deal with on top of the myriad they already face daily. Those who have the stomach for it I have so much respect for.
It goes without saying, you have to be a somewhat crazy person to want to build a career in hospitality. Profit margins are as thin as can be, if any at all. You’re constantly seen in the lower rung, even third class if class structures were still a thing. Just getting a restaurant off the ground will cost you a fortune and the regulations for doing so are never easy. For every restaurant that succeeds, 10 have failed in its place. Yet, in spite of all these hurdles, restaurants still open. Optimistic entrepreneurs still dare to dream.
There’s really only one other sector that’s similar to owning a restaurant and that’s the marriage industry. Both have horrible success rates. Surprisingly, however, even in light of tremendous obstacles, people still attempt both.
Ultimately, why I believe this to be so has to do with how each makes us feel. There’s nothing better than love. It’s the best drug known to man. 1000x superior to heroine. A good meal, a well prepared drink, the laugh with great company are the hallmarks of excellent hospitality. Done right, a night out can be enchanting. Magical. The high brings us back and it’s why whenever we travel, booking time for a delicious meal is always priority number one.
The pandemic has shown how vulnerable this industry is, but it’s also revealed how important its standing within our society it fits.
From Wine Spectator:
Napa Valley’s Duckhorn Vineyards became a publicly traded company on the New York Stock Exchange today when it began offering 20 million shares of common stock at an initial asking price of $15 a share. It opened at $18.60 this morning. Its trading symbol is NAPA. Duckhorn’s IPO makes it the first major wine company to go public since the late 1990s, a move that potentially marks a new chapter in the history of California wine but raises numerous challenges.
In 2007, private-equity firm GI Partners bought a majority stake in the company, then valued at more than $200 million. In 2016, TSG Consumer Partners, another private-equity firm based in San Francisco, purchased control for an undisclosed price — sources say roughly $600 million.
“I think our founders set the stage — creating shareholder value has always been in our DNA. We’re pretty dogmatic in what we do and what we do well and we’ve had two great partners,” Ryan said.
Under TSG’s ownership, Duckhorn continued to expand its portfolio and bought the historic Central Coast Pinot Noir producer Calera in 2017 and Sonoma Pinot Noir powerhouse Kosta Browne in 2018. If the initial public offering comes in at the midpoint of Duckhorn’s estimates, the company, now formally known as The Duckhorn Portfolio, Inc., would have a market value of $1.8 billion, according to Renaissance Capital, an IPO research firm. TSG will maintain control of 77.7 percent of the shares of the stock at the outset. The company expects to collect net proceeds of $181 million from the public offering.
IPOs are normally used to fund growth and acquisitions.
Forget the numbers and think of the possibility here. Looking to grow, Duckhorn decided they’d list off a portion of their company for investors. This move will give them capital to expand their brand.
This “concept” isn’t new within the restaurant community. Most restaurants are run and built with several investors involved. But the burden lay there always, with a small share of individuals holding a vast amount of risk. But, this way of doing business has it downfalls, all of which I’ve detailed above. There are limits to capital for most. Lack of cashflow. These restrictions often hamper future and current decision making. If given over to the public, a strong brand or group of investors could develop a better company.
“SPACs are special purpose acquisition companies, essentially shell companies that raise money from investors through stock-market listings. After going public themselves, they look for private companies to buy.” — Marketplace
The growth of the SPAC market has exploded recently, with good reason. It’s easier than a traditional IPO and it gives over to innovation. With a great team in place, the capital raised through the SPAC can deliver promising growth and stability for companies just developing or on the rise.
From Aloke Gupte, a top JP Morgan banker:
So, for example, a company that is extremely well established, has huge revenues, is profitable, is a very well-known brand either in the broad market or in its own industry, is likely to always choose the IPO route. But a company which is slightly more early-stage, slightly more in a place where the proof of concept is not completely there or is in a sector which is a bit complicated for the layman or laywoman to understand, and where you can actually benefit by having a SPAC because a SPAC, crucially, allows a company to share with investors its forward business plan.
Particularly, when you look at, you know, auto-tech companies or electric-vehicle manufacturers, there are many of them. All of us know that there will be more electric vehicles on the street in 2030 than there are today. That is undoubtedly true. But the question is, whose vehicles will they be? We certainly know they’ll be Teslas, but what else? And in that light, I think these companies are able to use the SPAC route to better explain what they plan to do. You know, “I’m going to make an electric van, and this is how I’m going to do it. And this is my plan to be able to sell X number of vans by 2024,” thereby allowing investors to get a better and deeper understanding of what the company is seeking to do over a period of time, and value it better, and understand it better.
Let’s say you take a solid management team, a group of individuals who’ve toiled and worked in the restaurant industry for a long time. They have vast amounts of experience and savvy entrepreneurial skills. Maybe in this climate, with a SPAC option on the table, they see an opportunity.
From NRN:
Danny Meyer has joined the growing number of restaurant veterans who have formed special acquisition companies, or SPACs. An affiliate of his Union Square Hospitality Group, USHG Acquisition, on Friday filed papers with the Securities & Exchange Commission to raise $250 million in an initial public offering, and then list on the New York Stock Exchange under the ticker HUGSU.
This concept of going public isn’t for everyone. Mom and Pops are not designed for this. But the idea shouldn’t be left only to the Danny Meyer’s of the world or his closest big market competitors. Smaller teams should examine this idea. Learn from the Meyer’s of the world. Rethink the restaurant model. I see great promise as we approach the end of this pandemic. SPAC’s have added a new wrinkle. I look forward to seeing how this plays out.