Shake Shack Shimmies Up The Charts – Big IPO Debut

We previously mentioned Shake Shack’s IPO filing here.

SHAK increased its offering range from $14-16 to $17-19 and ultimately priced at $21, raising $105 million (before expenses and underwriting discounts).  Demand was obviously high for these burger purveyors.  At this writing, the stock price is $45.90 and the market cap is about $1.6 billion.  It has 63 restaurants and net income for 2013 of $5.4 million (before adjustments for certain transactions).

By way of comparison:

Buffalo Wild Wings owned 434 locations and franchised an additional 558 locations, had net earnings for 2013 of $71.6 million and has a market cap of about $3.4 billion.

Bloomin’ Brands owned and operated 1,344 and franchised 164 restaurants under the Outback, Carrabba’s, Bonefish, Fleming’s and Roy’s brands, had net income for 2013 of $214.6 million and has a market cap of about $3.2 billion.

Or El Pollo Loco:  2013 loss of $16.9 million but net income of $38 million through three quarters of 2014 – $984.3 million market cap.

Do you think that huge future location growth is built in to this price.  Do you think we think so?  There is some serious brand building going on among burger eaters and investors.

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Shire Rings In The New Year With Deal To Buy NPS Pharmaceuticals For $5 Billion

Shire Brushes Its Shoulder Off and cuts deal for NPS.

Logo - ShireLogo - NPS




In October, Shire’s (Nasdaq – SHPG) ill-fated $52 billion deal with AbbVie died due to hysteria over tax inversions.

“The deal is the largest casualty yet of rules announced last month by the U.S. Treasury Department to make tax inversion deals more difficult. The new rules “reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions,” AbbVie said late yesterday in a statement.”

Shire is bouncing back, at 1/10th the size, announcing that it has entered into an agreement to acquire NPS Pharmaceuticals (Nasdaq: NPSP), a biopharmaceutical company focused on therapies for patients with rare diseases. The deal is valued at about $5.2 billion. To demonstrate the scale of the premium, NPS had a loss of $1.5 million on about $156 million in revenue in 2013.

What are the odds a competing bidder will show up? The termination fee is $156 million, almost triple the amount of cash, and 63% of current assets, of NPS as of September 30, 2014.

Shire follows Jay-Z’s advice.

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Dick’s Sporting Goods May Be A Private Equity Target

There has been some commentary that Dick’s Sporting Goods may be a good candidate for PE firms and is contemplating an LBO.

According to the article, at a premium, Dick’s could be valued at just under $8 billion.

Looking at the last year end numbers, Dick’s had current liabilities of about $1 billion, long-term debt of about $330 million against about $3 billion of total assets.  Sales had increased from $5.2 billion to $5.8 billion to $6.2 billion from 2012 to 2014.  Profit margins were 5%, 5% and 5.4% for those years.

Debt has increased a bit over the last few quarters to $1.3 billion in current liabilities and $733 million in long-term liabilities, against $3.7 billion in total assets.

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Wet Seal In Default On Loans, Closes Stores and Fires Employees

Wet Seal gets (very little) breathing room from lenders, but trouble ahead.

Wet Seal in trouble

It has been tough for clothing retailers as dEliA*s and Deb Stores recently filed for bankruptcy.

Is Wet Seal next?

Today they announced that the Company was closing 338 stores after landlords refused to cave into their demands. Those stores represented about 48% of its sales.

Wet Seal will be left with 173 stores and its e-commerce business. It is firing almost 3,700 employees.

This saga began in late December when the Company failed to make a payment on its convertible note. The lender called the note, which was about $28.8 million plus costs and expenses.

As of November 1, 2014, Wet Seal had about $93 million in total assets against $103.4 million of total liabilities, of which only $59.4 million was classified as current. The convertible note was listed in long-term liabilities at $13.9 million.

So, why couldn’t they cover the debt?

They lost almost $80 million during the 39 weeks ended November 1, 2014. Net sales were $316.3 million, but Cost of Sales and G&A alone were $362.7 million. They were hemorrhaging cash, beginning the period with about $39 million and ending it with about $19 million. The holiday season must have been awful.

The convertible note is payable in shares unless certain conditions are not met. Wet Seal did not announce why they could not pay in shares and did not file the agreements with the lender explaining the nature of the default, other than nonpayment.

Possible vulture candidate for high risk tolerant investors? Ask our clients.

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American Realty Capital Properties Responds to Corvex Management

Thanks for the attention.

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ARCP responds to Corvex Management

Underdisclosed favorite Corvex Management announced some intentions related to American Realty Capital Properties (NASDAQ: ARCP). To ARCP, the intentions were bad.

[Corvex believes] that it is beneficial to add representatives of the shareholders to the Board, particularly given the recent high level of personnel turnover at the company and the critical decisions the company is facing in the near term.

Translated: We’d like to be on the board to assist in directing management.

Consequently, the Reporting Persons have had discussions with the Board to explore the addition to the Board of a representative of the Reporting Persons and potentially other independent persons which might be suggested by the Reporting Persons. Further, the Reporting Persons have had and will continue to have discussions with the Board to share thoughts for enhancing value for all shareholders. Such discussions include, but are not limited to: business strategy and simplification, stabilizing and enhancing the value of Cole Capital, capital allocation, the search process for a new CEO and Chairman, and corporate governance.

Translated: We talked to the board and will continue to talk to the board until some changes are made.

The Reporting Persons may enter into discussions with other shareholders, industry participants and third parties in connection with all or some of the matters referenced in this Item 4.

Translated: Don’t make us call your father.

ARCP responded:

The ARCP Board of Directors is pleased that Corvex shares its belief that ARCP is an attractive investment. ARCP has had productive conversations with Corvex and be grateful for its support of the actions the Board has taken to date. The Board will continue to prioritize transparency and an open dialogue with all stockholders, as well as the best path forward for the Company and its employees, as it seeks to even out and strengthen ARCP.

Translated: We’ll keep talking until we are forced to do something.


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Some Light On The Xiaomi Valuation

The valuation on the recent financing for Xiaomi got a lot of attention. Here are some facts.

Upstart Chinese smartphone maker Xiaomi made some waves recently as its $1.1 Billion funding valued it at over $46 billion. The Wall Street Journal proclaimed that this made it the world’s most valuable startup, more than Uber and short of only Facebook’s 2011 private funding.

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Xioami releases some financial figures.

In four short years, it has 500 milion users. Yahoo Finance reports that its revenue more than doubled to $12 billion in 2014, selling 61 million phones in 2014. Its margins are very thin as it expands, and it expects the Chinese smartphone market to ease in 2015.  Apparently, Xiaomi CEO, Lei Jun, announced these numbers on some sort of Chinese Twitter, or “his official microblog account.”

In contrast, Apple sold 169 million iPhones and 68 million iPads in fiscal 2014.

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Wall Street Journal: Activist Funds Gearing Up For A Big 2015

Activist investors to continue providing employment support to analysts.

WSJ reports that activist investors have raised billions of dollars for campaigns that may take shape in 2015.  For those of us who review companies and deals for investors, we say “Hooray.”  Funds looking for potential targets and arbs sniffing around presumed, proposed and announced deals should have a busy year.

Through November, activists held $115.5 billion in assets, up from $93 billion to start the year, according to hedge-fund tracker HFR.

Familiar names like Ackman, Loeb and Icahn were featured prominently.  In addition to the bankroll, recent history is providing some confidence.

The success the investors enjoyed in getting their way in 2014 will test them in the coming years as companies they now control are scrutinized for signs that promised changes are paying off. If not, activists risk losing the support of other investors they rely on.

Split-ups and Spin-offs seem to be the popular request these days, with targets such as EMC, eBay/PayPal, DuPont and PepsiCo.



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Our Prediction for 2015

Most predictions for 2015 will be wrong, subject only to statistical chances for accidentally being correct.

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Shake Shack Files for IPO

Serving up burgers, fries, ice cream and Enlightened Hospitality.

Shake ShackShake Shack files for IPO.

Shake Shack is not just the latest casual dining company filing to go public, it is a modern day “roadside” burger stand.

It was founded by Danny Meyer, who must be prominent in the industry since he is name checked a few dozen times in the filing. For example,

The principles of “Enlightened Hospitality,” as defined by Danny Meyer, state that we prioritize our own people above all else, because we understand that taking care of each other is the foundation that enables us to provide uncommon excellence and hospitality to our team members, guests, our community, our suppliers and our investors. We refer to our customers as “guests,” as we treat anyone who walks into our restaurants, or “Shacks,” as if they were guests in our home.

Getting past the corporate niceties, Shake Shack had $78.6 million in sales in 2013, up from $55.6 million in 2012. There was also some licensing revenue that was minor in comparison. Net income was $5.4 million in 2013 (6.6% margin), up from $4.1 million in 2012 (7.9% margin).

The prospectus claims non-GAAP profit margins exceeding 25%, but that is at the unit-level and ignores substantial expenses.

We’ll see how they do as compared to the likes of recent restaurant and consumer food companies like Papa Murphy’s (FRSH), El Pollo Loco (LOCO) and Potbelly’s (PBPB).

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Facebook Mobile Ad Network Ready For Launch?

The Facebook mobile ad network is reportedly ready for announcement at the end of the month.

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Facebook reportedly to announce Facebook Mobile Ad Network this month.

We have made the case over and over again about how Facebook in particular, and consumer-facing online companies in general, will need to get their mobile house in order if they want to survive. Facebook was very vulnerable to this while its public company life was in its infancy. However, it has continued to improve its mobile strategy.
Along these lines, there are reports that Facebook will unveil the Facebook mobile ad network at its F8 conference at the end of the month. According to Re/Code:

“Facebook will pitch the ads to publishers and developers as a way to leverage the social network’s vast database of user information for better ad targeting. And Facebook wins by expanding its ad reach — now it can make money from its billion-plus users even when they’re not on Facebook’s own properties.”

Mobile is the driver of growth, but size, mobile OS’s and user behavior make it difficult to deliver ads that will drive customers to advertisers and ad dollars to Facebook. As Facebook has continued to shift its focus to mobile, it has experimented with how it can provide more ads to mobile users.

“A good chunk of that — perhaps 50 percent or more — comes from “app-install” ads, which prompt users to download apps or re-engage with apps they’ve already installed. The ad product was initially an afterthought in Facebook’s mobile ad strategy, led by Facebook engineering and platform leader Mike Vernal, who at one point only had a single engineer working on the project.”

There is plenty of existing competition for a Facebook mobile ad network. Existing players include such enterprise-level companies as Google and mobile ad upstarts like Twitter. Other lesser-known networks are also everywhere on the mobile Net.

“Facebook won’t be playing in the space alone. The company will take on Google’s existing AdMob mobile network, as well as smaller players like Millennial Media. And now Twitter is entering the fray, by linking its MoPub ad network to its ad buying platform, and rolling out app install ads of its own.”

Something tells us that Facebook does not particularly worry about competition, particularly with the inclusive Facebook environment as a base.

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