ECM Explorer North America: Cava Group IPO may encourage more restaurant groups to go public

Breaking News 15 June

ECM Explorer North America: Cava Group IPO may encourage more restaurant groups to go public

Cava Group’s [NYSE:CAVAinitial public offering is whetting investor appetite, and its dazzling debut could set the table for other restaurant groups to go public. 

The Mediterranean restaurant chain’s stock flew off the shelves on Thursday, surging as much as 113% before paring some of those gains. Washington, DC-based Cava priced its IPO at USD 22 per share – USD 3 above the top end of its initial USD 17-USD 19 range – to raise almost USD 318m at a USD 2.45bn valuation. Cava plans to use the proceeds to expand its fast-casual empire and pay down debt. 

Cava’s debut will encourage other IPO hopefuls to follow through, one advisor said, giving fresh impetus to established restaurant companies that were eyeing the exchanges but were unclear on timing. “This is a great sign for the IPO market,” he said. “Clearly, investors are hungry for new listings.” 

Brazilian steakhouse owner Fogo Hospitality and Korean barbecue chain Gen Restaurant Group are among the enterprises that have registered for IPOs with the US Securities and Exchange Commission. Panera Bread and Twin Peaks – a sports bar spin-off of Fat Brands [NASDAQ:FAT] – have also signaled their desire to go public. 

According to industry sources, other restaurant brands are in the queue as well, with some of them contemplating whether to follow Cava out this year or wait until 2024. 

After two years of devastation from the COVID-19 pandemic that brought on-site dining to a halt, the industry has rebounded nicely with some players realizing healthy profit margins, the sources said. 

“Coming out of the [pandemic], businesses are doing very well and trends look good, so they think, ‘Let’s go public,’” a second advisor said. 

Last year, only one restaurant firm, ramen chain Yoshiharu Group [NASDAQ:YOSH], tested the public markets in North America, raising just USD 17m in its offering. Its stock is down 82% from its IPO price. 

But in 2021, five eateries went public, collectively raising USD 1.65bn — the best year in value terms in the past two decades. However, the volume of new issuance by restauranteurs has been lumpy, a review of Dealogic data shows. 


Source: Dealogic 

A recipe for resurgence  

Comps are largely favorable for the sector’s IPO candidates. 

Fogo Hospitality will be compared to Darden Restaurants [NYSE:DRI] and Ruth’s Hospitality Group [NASDAQ:RUTH], which are up about 45% and 20% over the last 12 months, one of the advisors noted.  

Fast-casual comps Shake Shack [NYSE:SHAK] and Chipotle [NYSE:CMG] have fared even better, with their shares up more than 75% and 60% respectively over the last year. Meanwhile, salad chain Sweetgreen [NYSE:SG] went public in late 2021 with much fanfare but has lost nearly 80% of its value, largely because it has not turned a profit in 17 years, the same advisor said. 

Profitability can make or break a business in the current market environment. 

Kenvue [NYSE:KVUE], the consumer health spin-off from Johnson & Johnson [NYSE:JNJ] that went public last month, showed there is demand for profitable, cash-flowing companies with predictable revenues, the advisor continued. Then again, Cava is not profitable and has seen its net losses grow, but that didn’t hurt its offering, he noted. 

High interest rates are keeping many strategic and private equity buyers on the sidelines, an executive explained. 

Interest from special purpose acquisition companies is also subdued now that the speculative craze of two years ago has ended, a second executive said. 

Many operators view an IPO as their best option to achieve premium valuations that can continue the trajectory of their last private funding rounds, he added. 

“All my counterparts are looking at IPOs. They all say this,” the executive said. 

Is the IPO window open? 

Prior to Cava’s debut, the opportunity for new issuance this summer was expected to be short-lived, according to the sources. If Cava and other newly minted companies continue to perform well, more firms could follow in their footsteps at the end of the year or in 2024, they said. 

Even so, rising costs and labor shortages present serious challenges for restaurants, the sources cautioned.  

Brands that ably navigate operational headwinds, generate large cash flows and position themselves for profitability will be the ones that should find the most success, they added. 

Other eateries in the queue for listings later this year or in 2024 include P.F. Chang’s and Torchy’s Tacos, according to reports. Velvet Taco, backed by Leonard Green & Partners, could opt to pursue an IPO a little later, one of the executives said. The unit economics on taco sales are very attractive, he noted. 

Despite major market challenges, restaurants have proven to be resilient. 

“The industry grows every year because Americans don’t know how to cook food,” one advisor quipped. “We like to eat out.” 

Your M&A Future. Today.

Next-generation Mergermarket brings together human insights and machine intelligence to deliver groundbreaking predictive analytics.

Be the first to know with next-generation Mergermarket

Book a demo today