Arcos Dorados Holdings (proposed ARCO) is scheduling an $874 million IPO with a market capitalization of $2
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Arcos Dorados Holdings (proposed ARCO) is scheduling an $874 million IPO with a market capitalization of $2.975 billion at the price range mid-point of $14 for Thursday, April 14, 2011. ARCO is based in Buenos Aires, Argentina |
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SUMMARY & CONCLUSION |
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. Shareholders intend to sell 80% of the IPO, or $700 million.
. ARCO is unique because it is McDonald’s (MCD) Master franchiser for Latin America and is the market brand leader in a growing market.
. The fast food segment in Latin American grew at a 14.5% compound growth rate from 2004 to 2009, according to Euromonitor, which also estimated the fast food segment in Latin America totaled $35 billion in 2010. |
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. In addition, Euromonitor estimates that the growth of Quick Service Restaurants in Latin America and the Caribbean will outpace the growth of the fast food segment generally in the near future.
. ARCO sales increased 14.9% in 2010 versus 2009. |
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Concerns: |
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. To increase future top line revenue, ARCO should increase the rate of new stores openings by more than the 4% (75 stores) for 2010 vs 2009. |
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. Operating income % declined in a straight line from 2008 through 2010: 9%, 8%, 7%.
. In addition, almost half of operating income is expensed to non-operating expense. The amounts are significant. For 2008, 2009 and 2010 they are respectively $106 million, $107 million and $96 million. |
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Valuation Ratios |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
Gross |
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Year ended Dec 31, 2010 |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
Margin |
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Arcos Dorados (ARCO) |
$2,975 |
1.0 |
28 |
4.5 |
4.9 |
34% |
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McDonald's (MCD) |
$80,000 |
3.3 |
16 |
5.5 |
6.6 |
40% |
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Comparing ratios between ARCO and McDonald’s (MCD)…ARCO would sell for
. 10 times EBIDTA vs McDonald’s (MCD) 9.14 multiple – a premium
. 28 times 2010 earnings vs, 16 for MCD -- a large premium
. One times sales vs 3.3 for MCD – a discount
. 4.5 times book value.vs 5.5 for MCD – a discount. |
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. ARCO’s gross margin is 33%. As expected it’s lower than MCD’s gross margin of 40%. |
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BUSINESS |
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ARCO is the world’s largest McDonald’s franchisee in terms of systemwide sales and number of restaurants, according to McDonald’s, representing 5.1% of McDonald’s global sales in 2010.
ARCO is the largest quick service restaurant, or QSR, chain in Latin America and the Caribbean in terms of systemwide sales, according to Euromonitor, with a regional market share in terms of sales of 12.4% in 2009, according to Euromonitor. |
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MASTER FRANCHISOR |
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. ARCO has the exclusive right to own, operate and grant franchises of McDonald’s restaurants in 19 countries and territories in Latin America and the Caribbean, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, Uruguay, the U.S. Virgin Islands of St. Croix and St. Thomas, and Venezuela (referred to as ‘the Territories’). |
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. As of December 31, 2010, ARCO operated or franchised 1,755 McDonald’s-branded restaurants, which represented 6.7% of McDonald’s total franchised restaurants worldwide. In 2009 and 2010, ARCO paid $121.9 million and $141.0 million, respectively, in royalties to McDonald’s (not including royalties paid on behalf of ARCO’s franchisees). |
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. 1,292 (or 74%) were ARCO-operated restaurants and 463 (or 26%) were franchised restaurants. |
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MARKET |
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According to Euromonitor, fast food segment sales in Latin America and the Caribbean totaled an estimated $34.9 billion (nominal value) in 2010. Euromonitor estimates that the fast food segment in Latin America and the Caribbean grew 97% in the period from 2004 to 2009, which is 27 percentage points higher than the growth of the Latin American and Caribbean food service industry as a whole.
14.5% compound growth -- Euromonitor estimates the fast food segment in Latin America and the Caribbean grew at a compound growth rate of 14.5% from 2004 to 2009
. McDonald’s, Burger King, Subway and KFC have positioned themselves as market leaders within the QSR segment. According to Euromonitor, the McDonald’s brand is the largest in Latin America and the Caribbean with almost three times the sales of Burger King, the closest competitor, in Latin America and the Caribbean and with more sales than the next four competitors combined. In addition to these international brands, strong local brands, such as Habib’s, Bob’s, Servicompras and Giraffa’s, exist in certain key markets |
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MASTER FRANCHISE AGREEMENTS (MFA) |
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ARCO received exclusive master franchising rights from McDonald’s for the Territories on August 3, 2007 when Woods Staton, ARCO Chairman, CEO and controlling shareholder, Gavea Investment AD, L.P. and investment funds controlled by Capital International, Inc. and DLJ South American Partners L.L.C. (through its affiliates) purchased McDonald’s LatAm business for $698.1 million (including $18.7 million of acquisition costs) and entered into the MFAs.
. Prior to the Acquisition, Woods Staton had been the joint venture partner of McDonald’s Corporation in Argentina for over 20 years and had served as President of McDonald’s South Latin America division since 2004. |
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USE OF PROCEEDS |
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. $163mm from sale of 12.46mm shares. Shareholders intend to sell 50mm shares, or 80% if the IPO.
. ARCO has agreed with McDonald’s to will use $150.0 million of the proceeds for opening and reimaging restaurants, which will be in addition to restaurant opening and reinvestment commitments under the MFAs described |
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Arcos Dorados Hld |
ARCO, C+, 7.5 |
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Post IPO shares: 212.5mm |
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McDonald's largest franchisee |
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Buenos Aires, Argentina |
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2008 |
2009 |
2010 |
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IPO Mkt |
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Revenues ($mm) |
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$2,607 |
$2,665 |
$3,018 |
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Cap (mm) |
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Systemwide sales growth |
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---- |
5.5% |
14.9% |
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$2,975 |
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Gross margn (food & paper) |
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34.6% |
34.9% |
33.9% |
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@$14 |
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Oerating income ($mm) |
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$222 |
$207 |
$205 |
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Oerating income % |
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9% |
8% |
7% |
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Non-operating expenses |
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Interest |
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-$26.0 |
-$52.0 |
-$42.0 |
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Loss from derivatives |
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-$3 |
-$40 |
-$33 |
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Foreign currency results |
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-$75 |
-$14 |
$3 |
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Other non-oerating results |
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-$2 |
-$1 |
-$24 |
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Total non-operatig exp |
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-$106 |
-$107 |
-$96 |
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% non-operatng exp / operating inccome |
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48% |
52% |
47% |
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Pre-tax |
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$110 |
$99 |
$117 |
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Income tax expense |
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10.4% |
18.9% |
3.1% |
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Net to ARCO |
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$103 |
$80 |
$106 |
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Net income % of rev |
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4.0% |
3.0% |
3.5% |
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Adj EBITDA |
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$288 |
$266 |
$299 |
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EBITDA % of revenue |
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11.0% |
10.0% |
9.9% |
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Market cap / EBIDTA |
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10 |
% increase |
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End of period openr restaurants |
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1680 |
1755 |
4% |
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Valuation Ratios |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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Year ended Dec 31, 2010 |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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Arcos Dorados (ARCO) |
$2,975 |
1.0 |
28 |
4.5 |
4.9 |
29% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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2 |
1.5 |
2.5 |
1 |
7.5 |
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COMPARE |
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Valuation Ratios |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
Gross |
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Year ended Dec 31, 2010 |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
Margin |
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Arcos Dorados (ARCO) |
$2,975 |
1.0 |
28 |
4.5 |
4.9 |
34% |
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McDonald's (MCD) |
$80,000 |
3.3 |
16 |
5.5 |
6.6 |
40% |
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