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Fine Food, but Not-So-Tasty IPOs


No one except my mom ever accused me of having a small appetite. But the very moment a $27.75 lunchtime steak reached my table recently at New York's Smith & Wollensky, I could see defeat was at hand. I finished maybe one-third. Yet somehow, between the food, the cheery commotion, and the restaurant's old-time atmosphere--you half-expect to see Babe Ruth at the bar--I left hoping to return soon.

It's this strangely pleasant elixir that has made S&W a fixture in New York and six other cities, from Miami Beach to Las Vegas. Now, the company that owns or runs these restaurants plus seven more, including Manhattan Ocean Club and Cit?, wants to sell you not just steak but stock, too. Smith & Wollensky Restaurant Group aims in May to make a $50 million initial public offering. And rivaling it for investor dollars is Briazz, a chain of Caf?s with ties to Starbucks (SBUX) founder Howard Schultz. Briazz (pronounced bree-oz) is set to come public in a $20 million deal.

SOUR CREAM. With IPOs of tech companies all but impossible--anyone recall what Sohu.com, off 92% from its July IPO, does?--Wall Street hopes we'll swallow what we all understand: food. Peet's Coffee & Tea (PEET) and AFC Enterprises, operator of Popeyes Chicken & Biscuits and Church's Chicken outlets, both came public this year. Peet's trades near its $8 IPO price, while AFC is up an enviable 14%.

Should you bite? Yes, I enjoyed lunch at S&W. And yes, I've heard glorious tales about Briazz's signature sour cream coffee cake muffin with crushed walnuts on top. (I also hear Briazz employees wear aprons promoting the IPO.) But no: Chances are your portfolio will thank you if you resist these two deals (table).

Both companies are keeping quiet, but securities filings lay out the terms. Although little-known nationally, Briazz has 40 Caf?s in four cities: Seattle, San Francisco, Los Angeles, and Chicago. It targets what it calls the "on-the-go" office worker with breakfast and lunch items that are fixed and packaged in central kitchens, then distributed to each cafe. Sales shot up from less than $3 million in 1996 to nearly $34 million last year. Just in its four existing markets, Briazz sees the chance to add 150 Caf?s in five years.

Don't expect another Starbucks, however. Schultz, with a 9.9% stake, left the Briazz board in January. He remains an adviser, but you have to wonder how long the company will be around to take his advice. In its first five years, it posted steady losses, totaling more than $41 million. The future? Don't take it from me: Briazz's accountants in March decided that its losses and hunger for fresh capital "raise substantial doubt about its ability to continue as a going concern."

WHERE'S THE BEEF? Only next to Briazz does S&W look at all palatable. Its green-and-white Manhattan flagship opened in 1977. Last year, it took in $27 million, almost triple the sales at Cit?. Starting in Boston in 2002 and continuing over the next few years, it hopes to add S&Ws in three or four more cities. That should keep revenues, which last year topped $81 million, growing.

Even so, I see reasons to avoid S&W. First, insiders are selling one-fifth of the IPO shares. So 20% of the proceeds go to current investors, not the company. Second, S&W doesn't own the Manhattan restaurant. It only runs it, for a fee of 2.3% on sales. The owner, who's free to fire S&W, turns out to be a partnership partly controlled by S&W CEO Alan Stillman--a New York-cut conflict of interest.

Finally, S&W has been steadily unprofitable. It did generate $3.6 million in cash in 2001, but at that S&W is coming public at 24 times cash flow. Someone must have ordered a second bottle of wine: Rival Morton's Restaurant Group (MRG) goes for six times cash flow; Benihana, five times. After the bacchanal in tech IPOs, stock in restaurants may look simple and safe. But do yourself a favor: Stick to the steaks.

Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711 By Robert Barker


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