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JULY 19, 2004
Domino's IPO: Not As Tasty As It Smells Hungry for an IPO? With Google in the wings and first-day pops such as those lately at software makers Blackboard (BBBB ) (up 43%) and Salesforce.com (CRM ) (56%), it's only natural to feel greed's pang. Now, Wall Street wants you to save an appetite for the initial public offering coming soon from a familiar name: Domino's Pizza. With nearly 7,500 outlets worldwide, Domino's, based in Ann Arbor, Mich., is so well-known that it has many earmarks of a can't-miss proposition. In a $385 million deal led by J.P. Morgan Chase (JPM ) and Citigroup (C ), the No. 1 pizza deliverer is set to sell 37% of its equity to the public at an estimated $16 a share. Current owners, mostly funds run by Bain Capital, plan to keep $219 million of the net proceeds. Domino's aims to use most of the $137 million it nets to pay off some debt. The fresh cash can only aid Domino's in its war with Papa John's International (PZZA ) and Yum! Brands' (YUM ) Pizza Hut chain. Less certain is whether Domino's can satisfy investors' hunger for a hot stock. AHEAD OF THE IPO, Domino's is keeping mum. Yet students of entrepreneurship, franchising, and Roe v. Wade all will recall its story. Founded in 1960 by Thomas Monaghan, who grew up in foster homes and a Catholic orphanage, Domino's eventually brought him wealth enough to buy many worldly baubles -- cars, houses, even the Detroit Tigers -- plus a controversial role in the anti-abortion crusade. By 1998, he decided to focus more intently on that and a host of other Roman Catholic causes via his Ave Maria Foundation (which is set to sell 3 million shares in the IPO). So Monaghan quit as CEO and sold 93% of Domino's to Bain. In the next five years, Bain expanded Domino's locations by one-fifth. Sales in that time rose 13%, to $1.3 billion last year. Pretax income fell 2%, to $62 million. Look again at those numbers. For all of Bain's work -- and archrival Papa John's concedes that Domino's is sharper under Bain -- making pizzas remains one tough biz. The other day, I stopped by a Domino's and saw I could take home a hot 14-inch pepperoni pizza for $6.50. The price of a 12-inch DiGiorno's pepperoni pie from the supermarket freezer? $6.47. David Flanery, Papa John's CFO, told me the industry is hooked on discounting. "We have got to break that cycle of dependence" on promotions, he said. Higher costs are squeezing margins, too. Cheese spiked to more than $2 a pound this spring, from last year's average of $1.31. It has fallen to $1.44, but the episode rattled anyone who makes pizza for a living. Amid this harsh climate, what has happened to the value of Papa John's shares? It had a total enterprise value (stock market value plus net debt) of $1.2 billion in December, 1998, when Bain bought Domino's. Today, Papa John's enterprise value is $600 million. At an IPO price of $16 a share, Domino's would command an enterprise value of $2 billion. That's twice the $1 billion value Bain placed on Domino's back in 1998. Papa John's value has been halved, while Domino's, in the IPO, could double. True, Domino's is both bigger -- helpful in spreading TV advertising costs over more stores -- and enjoys more growth abroad. But what's that worth? Imagine you could buy all of the equity in Papa John's or Domino's. The cash return on Papa John's figures to be much higher (charts). In the latest four quarters, ended in March, Papa John's generated free cash flow of $53 million, a 10.2% return on its current market value. Domino's generated $58 million, a 5.2% return. Maybe that relationship will change one day. Why anyone would bet that it will, I can't imagine.  By Robert Barker
BW MALL
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