Earlier this month, arcade and entertainment-themed restaurant chain Dave & Buster’s (PLAY) filed for its initial public offering, which will trade on the Nasdaq under the ticker “PLAY.” Now it appears we’re closing in on the finish line — according to a recently amended S-1, the Dave & Buster’s IPO will be priced between $16 and $18 per share.
The document also says Dave & Buster’s will put about 5.9 million shares up for sale. However, a provision allows a total of 882,352 additional shares of PLAY stock to be purchased by underwriters Jefferies, Piper Jaffray (PJC), William Blair, Raymond James (RJF) and Stifel (SF).
If it prices at the high end of the range, the Dave & Buster’s IPO could raise as much as $121.76 million. Obviously this is a far cry from the size of the Alibaba (BABA) recent offering — the Alibaba IPO was the biggest in history, raising an incredible $25 billion — but it’s not peanuts.
Of course, what matters is what Dave & Buster’s plans to do with all of that cash.
The unexciting truth of the matter is that every penny is expected to go toward repaying debt, interest and related fees. Unlike many hot IPOs, this money isn’t going toward further fueling the fires of breakneck growth.
But at least after all is said and done, D&B will be in a better financial position, right?
Well, better, maybe, but still not in a great position.
“After giving effect to the application of the proceeds from this offering, our aggregate indebtedness will be approximately $439.0 million on an as adjusted basis…”
In other words, D&B still will be loaded down by debt. From an investor’s perspective, that’s a major concern. Dave & Buster’s has been around since 1982 and has just 70 company-owned stores to its name. All the same, it does plan on opening seven to eight stores in fiscal 2014, and it claims that third-party research shows it has a total store potential of more than 200 stores.
If 200 stores seems like a long ways off, that’s because it is. But with Dave & Buster’s focusing increasingly on small-store formats, the company should be able to find attractive new locations more easily and put up less money while doing so. But D&B will need to keep its rate of expansion steady, which could be difficult to do if the company remains leveraged and free-cash-flow-poor.
Either way, investors can expect the vast majority of the company’s cash flows from operations to be gobbled up by capital expenditures for the next couple of years, leaving little cash behind.
When PLAY stock begins trading, Wall Street likely will demand more robust growth or push for a franchise model. And investors certainly will be looking at the debt burden.
In other words, even if Dave & Buster’s continues to right the ship eventually, don’t expect PLAY stock to rocket to the moon on its first day of trading.
As of this writing, John Divine did not hold a position in any of the aforementioned securities.
