DavCo scraps public offering

Crofton restaurant owner decides to remain private

Lukewarm market is blamed

Company is big franchiser of Wendy's, Friendly's

February 12, 2005|By Blanca Torres | Blanca Torres,SUN STAFF

DavCo Acquisition Holding Inc. of Crofton withdrew its registration for an initial public offering this month, fearing lukewarm sales of the stock, a company executive said yesterday.

DavCo, owner of more than 150 Wendy's and Friendly's restaurants in the Mid-Atlantic, planned to sell enhanced-income securities, which Chief Financial Officer David Norman said have not sold well in the U.S. market.

The company had hoped to raise about $114.5 million through the sale to help pay off about $103.3 million in debt and address other expenses, according to documents filed with the Securities and Exchange Commission.

It "was a great product for our company, but the American investor just didn't warm up to it," he said.

An enhanced-income security allows a company to sell both debt and ownership in one stock. Norman said executives believed the security was a good fit because DavCo is a slow-growth company whose stock would not appeal to investors.

"You pass out the lion's share of your free cash flow and the investor gets a nice steady return of an interest payment and dividend return," Norman said.

But DavCo executives said they decided against selling the securities after watching other companies with comparable growth patterns fail at similar efforts.

Norman said DavCo, which has more than 5,600 full- and part-time workers, decided to refinance its debt instead and will remain private.

DavCo filed registration forms to sell the securities with the SEC in April. The company withdrew the plan last week.

Top Wendy's franchisee

DavCo is the country's largest Wendy's franchisee with stores in Maryland, Washington, D.C., and Northern Virginia. It started operating the hamburger restaurants in 1976, making it one of the chain's original franchisees.

The company had estimated annual sales of more than $210 million for the 12 months that ended in June 2004, SEC documents show.

DavCo was publicly owned from 1993 to 1998. Norman said the decision to return to private ownership was a response to a lackluster market for restaurant stocks during the late 1990s, when investors wanted fast-growing technology stocks.

One expert said investors have not embraced enhanced-income securities on Wall Street because they are more complicated than traditional stock offerings.

Unpopular securities

"The theory is great, reality is another question," said Tom Taulli, an adjunct professor at the University of Southern California's Marshall School of Business and author of Investing in IPO's. "The reality today is that investors are not buying it."

"Here's a company you could take to the public markets, but you have to take it at a discount to make it interesting to investors," Taulli said.

DavCo tried going public in Canada before registering for an offering in the United States. Their Canadian attempt was blocked because of an accounting rule that has since changed, Norman said.

He said if DavCo decides to go public later, executives likely would choose to do so in Canada, where a version of enhanced-income securities has been better received.

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