Repeat IPOs Offer More Evidence of a Frothy Market

(Bloomberg Opinion) -- Anyone seeking evidence of irrational exuberance in U.S. markets need look no further than Bitcoin, Gamestop and the excitement surrounding special purpose acquisition companies. But spare a thought, too, for Joann Inc., an Ohio-based chain of fabric stores. It's a prime example of another investment phenomenon meriting scrutiny: the repeat IPO.

It's not uncommon for companies to go from public to private to public again. Ideally, executives or private-equity firms make good use of the time away from the pressure of stock markets and quarterly earnings reports, fixing problems so businesses can emerge leaner, stronger and more profitable. With demand for shares as high as it is, though, it's worth asking whether the temptation to cash out is bringing companies back to market before they're ready.

Founded by German immigrants in 1943, Joann first went public in 1969, as Fabri-Centers of America Inc. Before going private again in 2011, the company (then Jo-Ann Stores Inc.) reported an annual $2.1 billion in sales from about 750 locations. In its recently filed IPO prospectus, the purveyor of “handmade happiness” reported $2.3 billion in sales from around 850 stores in 2019, the last full year before the pandemic. Not exactly a growth story.

That said, one thing has grown pretty dramatically during the company's 10 years in private hands: debt. Joann owed $930 million as of October 2020, up from zero at the end of 2011. In a letter to shareholders, chief executive Wade Miquelon noted that the number is actually down from $1.4 billion a year earlier. The company doesn't specify what it plans to do with the proceeds of its share offering, citing only “general corporate purposes.” But perhaps the aim is at least partly to pay down more of that debt.

Joann's closest competitor is The Michaels Companies Inc., which operates around 1,275 stores. It went private in 2006 and public again in 2014. More than six years later, its stock remains below its IPO price of $17 per share, despite a significant rise in the broader market. At the start of the pandemic, before interest in crafting surged, the stock was trading at less than $2 a share. Not a good omen.

Many others have cycled through the IPO hamster wheel. Dunkin Brands went public in 2011 and private again late last year. In 2006, Burger King completed what was then the largest IPO of a U.S.-based restaurant chain. It then went private in 2010, public in 2012, and merged with Canadian donut chain Tim Horton's in 2014 to form Restaurant Brands International. Further examples include PF Chang's and Panera (both now private), and Dell Technologies and Hilton Worldwide (both now public).

There's no rule that prevents companies from entering and exiting the public markets, but it does warrant a certain amount of skepticism when a company does so repeatedly. To be sure, public investors sometimes do well. But it's the executives, bankers and attorneys who almost always benefit. Private-equity firms can reap millions in so-called “transaction and monitoring” fees no matter how companies fare, and it's not uncommon for IPO fees to run around $50 million for a company with annual revenues of $1 billion, according to PriceWaterhouseCoopers.

Joann has some unique baggage. Miquelon's earlier stint as CFO of what was then Walgreen Co. resulted in a $160,000 fine for making misleading financial projections — a bit of history that doesn't instill a lot of confidence in the 24% year-over-year sales surge that Joann reported in the nine months ended Oct. 31. While at Walgreens, Miquelon also played a key role in the company's disastrous deal to set up Theranos blood-testing centers in its drugstores. He has been  involved in litigation with his former employer over the circumstances of his departure. A spokeswoman for Joann did not respond to repeated requests for comment.

That's a lot for investors to swallow. But in this environment, perhaps they will, and the hamster wheel will spin on.

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