Secondary offerings of stock always a double-edge sword. Obviously, it dilutes equity a bit. OTOH, it is painless when compared to the fixed monthly costs of debt-based financing.
What is most important is whether the street perceives that the company is capital constrained and the offering might open up new avenues to growth as opposed to merely exit strategy by selling shareholders (which is perceived as a negative). The analyst also tries to determine the cost savings involved if the offering is primarily to retire debt.
In the short run, I have found that the typical secondary offering has a slightly depressing effect on the stock when the announcement occurs, with a corresponding lift once the offering has been completed.
Some relevant bits from today's S-1:
Plans
The Company intends to expand in fiscal 1998 and 1999 primarily in new
markets outside of California. In fiscal 1997, the Company opened one restaurant
in Arizona, four restaurants in Florida, one restaurant in New Mexico, and one
restaurant in Utah. In fiscal 1998, the Company has opened three new
restaurants, one each in Florida, Utah and Nevada, and anticipates opening
approximately eight additional salad buffet restaurants outside of California.
The Company has signed one lease, purchased five sites and signed contracts to
purchase two sites to be opened in fiscal 1998. In fiscal 1999, the Company
anticipates opening twelve new restaurants. The Company has signed contracts to
purchase four sites to be opened in fiscal 1999. Expansion will allow the
Company to continue generally utilizing a central kitchen to serve
several restaurants located within a particular region. In addition, as a part
of its expansion strategy, the Company is evaluating the possibility of
developing its concept in alternative formats. The Company currently has no
plans to offer franchises.
...
The net proceeds to the Company from the sale of the shares offered by the
Company, at an assumed public offering price of $20.00 per share, are estimated
to be approximately $24.2 million ($28.8 if the Underwriters' over-allotment
option is exercised in full). The Company intends to use $23.4 million of the
net proceeds of this offering to retire all outstanding debt, which was incurred
primarily to fund the development of new restaurants. The Company intends to use
the balance of the net proceeds, along with additional sources of debt
financing, to finance the development of additional restaurants. As of March 31,
1998, the Company estimates that the aggregate cost of opening the remaining
eight restaurants planned for fiscal 1998 will be approximately $16.5 million of
which $6.6 million has already been incurred. Pending the above uses, the net
proceeds will be invested in short-term, investment-grade, interest-bearing
securities.
...
Restaurant pre-opening costs incurred in connection with opening new
restaurant locations, including hiring, training and legal costs, are currently
amortized over one year commencing with the opening of the restaurant.
Pre-opening costs averaged approximately $205,000 for the six restaurants opened
in the twelve month period ended March 31, 1998. See "--New Accounting
Standard."
...
The Company's principal capital requirement has been and will continue to be
funding the development of restaurants. From October 1, 1996 through March 31,
1998, capital expenditures totaled $27.5 million, $23.9 million of which funded
the development of new restaurants. The remaining capital expenditures primarily
funded maintenance at existing restaurants. In addition to budgeted capital
expenditures for the last six months of fiscal 1998 of $10.0 million for new
restaurant openings, the Company has budgeted $1.8 million in expenditures for
fiscal 1998 for capital improvements at existing sites. See "Business--Unit
Economics."
The Company intends to use the net proceeds of this offering to retire all
of its outstanding debt, which was incurred primarily to fund the development of
new restaurants. As a result, substantially all of the Company's assets will be
unencumbered shortly after the completion of this offering and the application
of the net proceeds therefrom. The Company believes that (i) internally
generated funds, (ii) available borrowings under the bank credit line and (iii)
funds that it will be able to borrow pursuant to secured credit facilities
consistent with its past practices, will be sufficient to meet the Company's
cash requirements through at least the end of fiscal 1999. After completion of
this offering and application of the net proceeds therefrom, the Company
believes that it will be able to arrange additional secured credit facilities on
terms at least as favorable to the Company as its current debt financing. If
these sources of financing are insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional equity or debt
securities or obtain additional credit facilities. There is no assurance that
financing will be available to the Company on favorable terms, or at all. |
