by Will Ashworth | October 2, 2012 1:51 pm
Entertainment/dining establishment Dave & Buster’s is set to go public this week. That is, it’s set to go public again. And a lot has happened since Dave & Buster’s was last publicly traded.
But first some details about Dave & Buster’s IPO. Released Oct. 1 in its preliminary prospectus, these points have been widely covered in the press, so I’ll cut to the chase. At the high end of the range, the company would raise net proceeds (assuming the overallotment is exercised) of approximately $112 million after deducting underwriting fees and related expenses. No shareholders will be selling, so 100% of the net proceeds will go to the company, which is planning to repay $89 million in senior notes and using the rest for corporate purposes.
Trading on the Nasdaq under the symbol “PLAY,” 19.4 million shares will enter a 180-day lock-up agreement that will see those shares available for sale in early April. Once again, assuming the overallotment, new investors will own 30% of the company, with the existing shareholders owning the rest. Dave & Buster’s enterprise value is approximately $693 million.
How Dave & Buster’s got here is an interesting tale. This isn’t its first time as a public company. Started in 1982 in Dallas by Dave Corriveau and Buster Corley, the founders sold 80% of the company to Edison Brothers Stores in 1989 in order to secure cash to expand faster. By 1995, Edison Brothers was in financial trouble, so it spun off its majority interest to its own shareholders.
Dave & Buster’s then raised $30 million to keep the expansion machine fired. For the next decade, it went through the usual ups and downs all businesses face, plus a failed management-led buyout in 2002.
In late 2005, Dave & Buster’s was losing money. Wellspring Capital Management acquired it in March 2006 for $383 million including $108 million in equity. With Dave & Buster’s no longer a public company, Wellspring brought in Stephen King as CEO; he’s been at the company ever since.
In 2008, Dave & Buster’s filed a registration statement to go public. That didn’t happen, thanks to a weak market for restaurant stocks. Instead, Wellspring sold the company in 2010 to Oak Hill Capital for $596 million. Wellspring and its partner in the deal, HBK, made approximately 427% on their investment over four years.
How will Oak Hill make out?
It invested $245.5 million in cash to buy Dave & Buster’s. In 2011, Dave & Buster’s repurchased $100 million in common stock from Oak Hill. After the IPO, Oak Hill will own 66.12% of D&B’s stock worth $259 million. Oak Hill will have $114 million in unrealized profits, which is a good return over two years, but it’s nowhere near the return Wellspring achieved.
So, either Oak Hill is looking to hold the shares for a considerable amount of time, or it feels there’s better use for the cash. If you’re interested in purchasing shares in Dave & Buster’s IPO, you better hope it’s the former and not the latter.
I’m skeptical about IPOs to begin with, so Dave & Buster’s doesn’t give me a warm, fuzzy feeling, given its history of short-term ownership. A big warning sign is its lack of execution. In 2000, it launched its first location in Toronto. It was going to be the first of six opened in Canada by 2004. That never happened.
The company bought back the 65,000 square-foot location from the licensee, Funtime Hospitality, in October 2003 for $4.1 million. Funtime was originally signed for a 10-unit deal. Since then, the only other location to open in Canada was a franchised unit in 2009.
D&B’s registration statement suggests the U.S. and Canada have room for 150 stores (59 at the moment), so it would appear that the company has capacity to grow. Unfortunately, its track record of properly executing growth is spotty at best. On this alone I’d avoid Dave & Buster’s.
On the positive side, CEO King has grown Dave & Buster’s adjusted EBITDA by 39% since joining the company. Unfortunately, most of this growth has come as a result of amusement revenues contributing a greater percentage of its overall sales. Machines are cheaper than staff to maintain.
To really grow, D&B needs to deliver a much better food and drink experience. As it stands now, it will continue to hit a ceiling on revenues, meaning the only way to grow is to open more units. But at 40,000 square-feet, its locations are cost-prohibitive.
If you want to invest in Dave & Buster’s — be my guest. However, as Gordon Gekko would say, “It’s a dog with fleas.”
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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