On June 8, FAT Brands Inc. (NASDAQ:FAT) has released a mixed offering of a newly issued Preferred Stock and Warrants, initially exercisable to purchase shares of the company’s common stock. Under the terms of the offering, each share of the Series B Preferred Stock is being offered at a price of $24.99, and each accompanying Warrant is being offered at a price of $0.01, for an aggregate price of $25.00. Each Warrant (trading with the ticker symbol FATBW) gives its holder the right to buy FAT at an exercise price of $5.00. At the time of completion of the initial offering, the preferred stock and the accompanying warrants start trading separately as our goal is to look in detail from all possible angles only the preferred stock, abstracting from the warrants and the common stock.
The New Issue
Before we submerge into our brief analysis, here’s a link to the 424B1 Filing by FAT Brands, Inc. – the prospectus.
For a total of 360,000 shares issued, the total gross proceeds from the preferred stock to the company are $9M. You can find some relevant information about the new preferred stock in the table below:
Source: Author’s spreadsheet
FAT Brands Inc. 8.25% Series B Cumulative Preferred Stock (NASDAQ: FATBP) pays a fixed dividend at a rate of 8.25% and has a par value of $25. The new preferred stock is not rated by the Standard & Poor’s and pays its distribution monthly. FATBP is practically anytime callable as the company has the right to redeem it:
– at a price of $25.00 plus an initial redemption premium of 10% (equal to $2.50) until the first year anniversary of the initial issuance date (July 2021);
– the redemption premium will decrease by 2% per year until the five-year anniversary (July 2025);
– after July 2025 FATBP will be redeemable at a price of $25.00.
Currently, the new issue trades deep below its par value of $25.00, at a price of $16.70 (66.8% of PAR), and has a 12.35% Current Yield and almost 800% Yield-to-Call. Of course, the artificially inflated YTC is mainly due to the three main reasons: (1) the possibility of an instant redemption, which generally takes place 30 days after the notification, (2) the increased with 10% call price, (3) and the extremely low price of the preferred stock. Still, after it is trading below its par value, the most important thing is that the new IPO’s Yield-to-Worst is equal to its Current yield, or in this case, 12.35%.
FAT Brands Inc. is a restaurant franchising company. The Company develops, markets, and acquires fast casual restaurant concepts around the world. The Company operates the Skinnyburger, Buffalo’s Cafe and Buffalo’s Express, Hurricane Grill & Wings, Elevation Burger, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses restaurant concepts, with more than 400 locations across eight states and 18 countries. The Skinnyburger restaurant provides meals in the burger restaurant segment. Skinnyburger uses lean-beef sourced from grain-fed steers raised in the United States. Buffalo’s Cafe is a casual dining concept. Buffalo’s Express is a quick-service variant of Buffalo’s Cafe that is co-branded with Skinnyburger locations. The Buffalo’s Cafe menu offers traditional and boneless chicken wings, 13 fresh-made wing sauces, classic American dinner platters, sandwiches, wraps, salads and other beverages. Hurricane franchises more than 50 locations across the United States.
Source: Reuters.com | FAT Brands Inc
Below, you can see a price chart of the common stock, FAT.
In terms of dividends, the company is currently not paying a cash dividend on its common stock, but it is distributing a quarterly stock dividend, representing the number of shares equal to $0.12 per share of the common stock.
In addition, with a total market capitalization of around $39.44M, FAT is the 10th smallest ‘Restaurant’ listed on the New York Stock Exchange (according to Finviz.com).
Below, you can see a snapshot of FAT Brands Inc.’s capital structure as of the time of its last quarterly filing in March 2020. You also can see how the capital structure evolved historically.
Source: Marketwatch.com | Company’s Balance Sheet
As of Q1 2020, FAT had total debt of $59.28M, ranking senior to the newly issued preferred stock. The new Series B preferred stock’s rank is junior to all outstanding debt and equal to the other future preferred stocks of the company. The Series B Preferred Stock is currently the only preferred stock issued by FAT.
At present, actually, FAT Brands has two more outstanding private preferred stocks:
- Series A Fixed Rate Cumulative Preferred Stock with a liquidation preference of $10M and accompanying warrants to purchase shares of FAT’s common stock at $7.83 or $7.20;
- Series A-1 Fixed Rate Cumulative Preferred Stock with a liquidation preference of $4.5M and accompanying warrants to purchase shares of FAT’s common stock at $11.75 per share;
However, the two issues have a mandatory redemption date five years after their issuance (on June 8, 2023, and July 3, 2023), and FAT classifies them as a long-term debt because they contain an obligation to issue a variable number of common shares for a fixed monetary amount.
With respect to ranking, the newly issued Series B Preferred Stock (FATBP) ranks senior to the Series A-1 Preferred Stock and pari passu with the Series A Preferred Stock.
The Ratios Of Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of FAT but to find out if its new preferred stock has the need quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 39.44/(59.28 + 9) = 0.59, which is low, especially considering that the book value of FAT’s equity is valued at $3M, compared to the market cap of $39.44. So, from a preferred stockholder point of view, it cannot be considered as very satisfactory.
- Earnings/(Debt and Preferred Payments). This is also quite an easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. However, in practice, this is inapplicable after, in the income statement, we can see the company reporting a loss for the past 3 years, $1.02M in 2019, $1.8M in 2018, and $0.61M in 2017. Last year when FAT came out to profit was in 2016, at a worth of $4.2M. The company’s total net result for the last 5 consecutive years is a profit of $4.28M.
Family and sector
As there aren’t any other exchange-traded preferred stocks issued by FAT and also there aren’t any relatively preferred stocks issued by other companies in the ‘Restaurants’ sector, I will compare the newly issued preferred stock with all outstanding exchange-traded fixed-rate preferred stocks issued by a small-cap company. As a “small cap”, I will use these companies with a market capitalization below $150M.
Source: Author’s spreadsheet
There are a total of 28 companies meeting the criteria with 42 issued fixed rate preferred stocks. Since that 16 of them have their dividend suspended, I will compare the newly issued FATBP with the rest 26 issues:
Source: Author’s database
Except for WVVIP, PW-A, and MTBCP, all other securities are trading below their par value and their Yield-to-Worst, like the new IPO, is equal to their Current Yield. In the following chart, we can see all issues by their % of par value and current yield:
With its YTW of 12.35%, FATBP gives 1.40% lower than the group’s average current yield of 13.74%.
If the Company fails to make a cash dividend payment with respect to twelve (12) or more consecutive or non-consecutive monthly dividends, the dividend rate on the Series B Preferred Stock will increase to $2.50 per share each year, which is equivalent to 10% of the $25.00 liquidation preference per share. In addition, if the Company fails to make a cash dividend payment with respect to eighteen (18) or more consecutive or non-consecutive monthly dividends, the holders of the Series B Preferred Stock, voting as a separate class, will be entitled to vote for the election of two additional directors to serve on our Board of Directors until all dividends that are owed have been paid.
Source: S-1A Filing by FAT Brands, Inc
Use of Proceeds
We intend to use the net proceeds that we receive from this offering as follows: $2,590,264 to redeem a portion of our outstanding shares of Series A Fixed Rate Cumulative Preferred Stock (the “Series A Preferred Stock”) and accrued and unpaid dividends on 85,000 shares of Series A Preferred Stock pursuant to a Stock Redemption Agreement expected to be executed with the holders of such shares; $300,000 to pay a portion of accrued and unpaid dividends on our Series A-1 Fixed Rate Cumulative Preferred Stock; and the remainder for general corporate purposes and possible future acquisitions and growth opportunities.
Source: S-1A Filing by FAT Brands, Inc
Addition to the iShares Preferred and Income Securities ETF
With the current market capitalization of only $6M, FATBP cannot be an addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index, thus it will not be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (PFF), which is important to us due to its influence on the behavior of all fixed-income securities.
FAT Brands is financing itself through an offering of a preferred stock accompanied by warrants, exercisable to purchase shares of the company’s common stock at the price of $5.00. With a market capitalization of $39.44, the common stock is one of the smallest restaurants listed on the New York Stock Exchange. Furthermore, with the book value of $3M, FAT has the third-highest Price-to-Book ratio in the sector. The company pays a stock dividend instead of a cash dividend equivalent to $0.12 per share of the common stock. The newly issued Series B Preferred Stock is priced at a rate of 8.25% with a par value of $25.00. FATBP may be redeemed by FAT Brands at any time at a price of $25.00 plus a redemption premium, which is currently 10% of its PAR. The redemption premium will be decreasing every year until the five-year anniversary. This, including the low market price and the possibility of an instant redemption, turns into a Yield-to-Call of 800%. Currently, the market price of $16.70 also translates into a Yield-to-Worst, equal to its Current Yield, of 12.35%. Generally, this issue cannot be defined as anything but an extremely high risk one.
Trade With Beta
Coverage of Initial Public Offerings is only one segment of our marketplace. For early access to such research and other more in-depth investment ideas, I invite you to join us at ‘Trade With Beta.’
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.