McDonald’s Operator Arcos Seeks Twice Chain’s Valuation
McDonald’s Corp. (MCD)’s biggest independent franchise operator, Arcos Dorados Holdings Inc., is seeking to sell shares at almost twice the valuation of the U.S. fast-food chain as its restaurants in Brazil spur growth.
The operator of 1,755 McDonald’s locations in Latin America and the Caribbean is offering 62.5 million shares tomorrow for $13 to $15 each, according to a filing with the U.S. Securities and Exchange Commission and data compiled by Bloomberg. At the midpoint, that would value the company at $2.97 billion, or 28 times last year’s earnings. McDonald’s trades at 16.4.
The expansion of Brazil’s economy has helped Buenos Aires- based Arcos more than quadruple net income since 2007, when it bought the McDonald’s Latin America business for $698 million. Sales at the operator’s McDonald’s outlets in Brazil, Latin America’s biggest economy, surged 33 percent last year, outpacing a 13 percent jump for all of Arcos. McDonald’s, based in Oak Brook, Illinois, grew 5.8 percent in the period.
“You have a product that’s been proven globally in developed and emerging markets,” said Matt McCormick, a money manager in Cincinnati at Bahl & Gaynor Inc., which oversees $3.6 billion and owns McDonald’s shares. “People want the accelerated growth they’re going to get by going into a market that’s yet to be saturated.”
IPOs This Week
Arcos is among the companies seeking a total of at least $2.4 billion in global IPOs this week, including Zipcar Inc. and Euroset Holding NV, the Russian mobile-phone retailer, which may raise as much as $1.26 billion in London. Glencore International AG, the world’s biggest commodities trader, will seek $9 billion to $11 billion in an IPO in London and Hong Kong, said one person familiar with the sale. It may announce plans for the offering on April 14, three people said.
In its IPO, Arcos will receive an estimated $163.5 million in net proceeds and has agreed to spend $150 million to open new McDonald’s restaurants and remodel existing ones. The company has $457.6 million of long-term debt, the filing shows.
The remaining proceeds will go to owners selling a total of 50 million shares in the offering: Rio de Janeiro-based Gavea Investimentos, Los Angeles-based Capital Group Cos., and DLJ South American Partners, a private equity group minority owned by Zurich-based Credit Suisse Group AG. Arcos Chairman and Chief Executive Officer Woods Staton will control 39 percent of the company and have 76 percent of total voting interest following the offering.
Staton was a regional head at McDonald’s before he and other investors took over the Latin America division four years ago. Since then, Arcos’s sales in Brazil have increased to account for more than half of last year’s revenue.
“It’s impossible to look at Arcos Dorados without considering that Brazil is both the majority of their earnings today and also likely the most significant portion of their earnings going forward,” said Connor Wilson, an analyst at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees about $78 billion. “Latin America may have better growth potential, but there’s also a unique risk profile that goes along with it.”
Arcos is pricing its shares at a discount to another publicly traded operator, McDonald’s Holdings Co. (Japan) Ltd. That chain owns or franchises more than 3,300 restaurants and trades at about 34 times last year’s earnings.
With 6.7 percent of franchised stores, Arcos is the largest operator in which McDonald’s has no equity stake. That’s followed by an operator in the Philippines with 1.2 percent of stores. McDonald’s, the world’s biggest restaurant chain, operates 80 percent of its stores through franchise agreements.
Arcos paid McDonald’s $141 million in 2010, excluding royalties paid on behalf of franchisees. Under the franchising agreement, Arcos must open a total of at least 250 new restaurants in the next three years, which it estimates will cost as much as $250 million. McDonald’s has the right to buy the nonpublic shares of Arcos if the franchise agreements aren’t extended when they expire in 2027.
The sale is being led by Bank of America Corp., based in Charlotte, North Carolina; JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. of New York; and Sao Paulo-based Itau Unibanco Holding SA. The shares will list on the New York Stock Exchange under the symbol ARCO.
In other IPO news, Zipcar, the car-sharing company that rents vehicles by the hour, is seeking $133 million. The Cambridge, Massachusetts-based company will offer 8.33 million shares for $14 to $16 each, according to its SEC filing.
Revenue at Zipcar increased more than sixfold to $186.1 million in the five years through 2010, while the company posted net losses totaling $52.1 million during the period, according to the prospectus.
The $15 midpoint of the range would value Zipcar at $579.3 million, or 93 times last year’s $6.2 million of earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with a ratio of 2.2 for Park Ridge, New Jersey-based Hertz Global Holdings Inc. (HTZ), which has car-sharing services in the U.S. and Europe and is named as a competitor in Zipcar’s filing.
“Investors are being asked to look at what type of earnings and cash flow Zipcar could generate in 2013 and 2014,” said Paul Bard, director of research at Greenwich, Connecticut- based IPO investment firm Renaissance Capital LLC. “People are not really focusing on the next 12-month price-to-earnings ratio, which is going to be very, very high.”
The company operates in 14 metropolitan areas, including London, and has more than 8,000 cars. It plans to expand in the U.S. and international markets including Europe, according to its filing.
Zipcar will list on the Nasdaq Stock Market under the symbol ZIP. The offering is being led by New York-based Goldman Sachs Group Inc. and JPMorgan.
Ellie Mae Inc., the Pleasanton, California-based operator of an electronic mortgage origination network, aims to raise $82.5 million tomorrow, selling 7.5 million shares for $9 to $11 each, according to its filing with the SEC and Bloomberg data.
The offering is being led by Barclays Plc of London. Ellie Mae’s shares will trade on the NYSE under the ticker ELLI.
========================================================= TOP DEALS THIS WEEK: Company No. of Shares Price Range Date Expected Arcos Dorados 62.5 million $13 to $15 April 13 Zipcar 8.3 million $14 to $16 April 13 Ellie Mae 7.5 million $9 to $11 April 13 ==========================================================