Shake Shack joins other food stocks at IPO table

ADD Shake Shack to the menu of restaurant companies going ­public.

Shake Shack sells burgers, hot dogs, shakes, french fries and other items at 63 restaurants around the world.

ADD Shake Shack to the menu of restaurant companies going ­public.

The New York-based company filed for an initial public ­offering yesterday, the latest dining chain seeking to capitalise on healthy investor demand for companies that cater to consumers. Shake Shack filed to raise as much as $US100 million ($123m), though that is a placeholder amount that could change.

The company is betting that the popularity of burgers will whet investor appetite for its offering. The US burger market, with $US72 billion in sales last year, was about twice the size of the next-largest category, pizza, Shake Shack said in the filing. The so-called “better burger” chains, a category that includes Shake Shack, Five Guys and Habit Restaurants, increased sales 10 per cent in 2013 over the prior year, to $US2.4bn, faster than the 1.2 per cent gain for general burger-chain sales, according to research firm Technomic.

Shake Shack’s IPO structure includes a number of tax and governance provisions that may protect the investment of Shake Shack’s early investors and founders, including New York restaurateur Danny Meyer.

The filing comes amid a robust year for restaurant-company IPOs. Dining and lodging was the second-best performing IPO sector in the US in 2014, with six deals gaining on average 52 per cent from their IPO price through to Friday, according to Dealogic. Consumer-products companies, gained an average 72 per cent.

Habit Restaurants, a fast-expanding burger chain with about 100 locations, is up 96 per cent from its November IPO price. Zoe’s Kitchen, a Mediterranean-themed restaurant, is up 97 per cent from its IPO in April. Mexican-style chicken chain El Pollo Loco is up 38 per cent since its July offering.

The IPO could value Shake Shack at more than $US800m, based on the trading of one of the company’s publicly traded peers. Habit Restaurants trades at about 55 times its 2013 adjusted earnings before interest, taxes, depreciation and amortisation. Both companies earned about $US15m by that measure.

Some investors expect 2015 to be a strong year for US companies that depend on consumer spending, which could rise due to falling petrol prices and an expanding economy. In addition, relatively few restaurant companies are publicly traded. “There’s a lot of pent-up investor demand,” said John Gordon, principal at Pacific Management Consulting, which researches restaurants.

Shake Shack started out as a hot-dog cart in New York’s Madison Square Park in 2001. It now sells burgers, hot dogs, shakes, french fries and other items at 63 restaurants around the world.

Revenue in the first nine months of 2014 surged 41 per cent, to $US84m, over the same period last year, while its profit decreased 20 per cent, to $US3.5m.

The company said in the IPO filing it had focused on new store openings.

While the company has a relatively straightforward business, its IPO has a complex structure.

According to the filing, Shake Shack plans to use the IPO proceeds to buy interests in a private partnership owned by investors including Mr Meyer and private-equity firms Leonard Green & Partners and Select Equity Group, all of which own more than 5 per cent of Shake Shack. (Alliance Consumer Growth, which invested in 2013, also owns a stake of at least 5 per cent.)

That partnership then will use some of the money it receives to repay a credit facility led by JPMorgan Chase, a lead bank on the IPO with Morgan Stanley. The credit facility will be used in part to fund a $US22m payout to private investors before the IPO.

Some of the money going to the partnership also would be used to fund new restaurants and renovate existing ones, the company said. It plans to open 10 new US Shake Shacks a year.

After the IPO, the private investors will continue to get payments from Shake Shack equal to 85 per cent of certain tax benefits the company might receive, an arrangement known as a “tax receivable agreement”.