One of the Top Concessions Providers Readying for Re-IPO

One of the Top Concessions Providers Readying for Re-IPO

The maker of your favorite ballpark hot dog, and also the company that stocks the stadium's toilet paper, Aramark, is exploring an IPO. If the offering goes through, it will be one of the largest privately held companies to come onto the public markets in some time. At a glance, Aramark is the kind of steady, relatively boring business that might make for a great long-term investment. But before investors yell, "Gimme a share over heya!", we'll need to see under the hood.

PE and PE
The first questions many will have about the company as going-public details emerge will regard debt load and valuation.

Aramark has been under the wing of private equity since 2007, when the founder and a group of PE firms took the company off the market for $6.3 billion. The public services company is a behemoth in its industry, servicing 38 national sports teams, 16 national and state parks, more than 1,000 school systems, and 1,100 health care facilities, and employing nearly 260,000 people, according to its latest 10-K. Though it likely won't attract nearly the interest and hype of, say, the $100 billion Facebook IPO, Aramark's imprint on the global business landscape is a deep one, and investors would be wise to take a closer look.

The company had owned the fast-growing, Web-based food-ordering site Seamless since 2006, but sold off a $50 million stake in 2011 to PE firms, and then spun the rest out to Aramark shareholders as a special dividend in 2012. This leaves Aramark with its core business operations.

The financials are just as substantial, if even a bit bloated. As of the end of 2012, Aramark looks to have quite a debt load -- $5.4 billion in long-term borrowings. The company earned just over $1 billion in annual EBITDA. When it was taken private in 2007, it held $2 billion in debt. Private equity firms are known to saddle their investments with debt as a means to realize profit potential.

Good debt or bad debt?
While Aramark certainly has a hefty balance sheet, it's not necessarily in bad shape. Since the beginning of this year, the company has successfully refinanced debt to later maturity dates, with some at more attractive rates.

Given the size and relative stability of Aramark's businesses, its debt load may limit cash flow, but shouldn't be a deep concern for investors.

Wait for more
As details emerge regarding the offering, we'll find out the most important factors: valuation, use of proceeds, etc. As most investors know by now, IPOs have a tendency to come out of the gates way too hot, but there are exceptions.

Aramark's competitors include U.K.-based Compass Group, which is a larger company and has been doing quite well according to recent earnings. The company also recently appointed former Diageo CEO Paul Walsh as its chairman. Compass is trading near its 52-week high, holds a little over 2 billion pounds in debt, and pulled in 1.48 billion pounds in EBITDA last year.

Both companies are aggressive competitors in the global food services industry, which, while saturated, still provides growth opportunities. Compass currently serves more than 4 billion meals per year, and recently stated that North America holds some of the brightest areas for growth. Though much larger (it holds the No. 1 spot in catering), Compass will be a good company to stack against Aramark once more details of the IPO emerge. The latter could be in a position to move up, as the No. 2 competitor, Sodexo, is in the midst of cost-cutting and has forecast flat profit.

Aramark is the kind of business a risk-averse investor might love, and there are signs that point to a favorable future for the company. As stated, though, it will come down to the offering details. So hang tight, investors.

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