Imagine your kid is having his birthday party at a Harvey's, and when you put in your order for 20 burgers, the surly teenager on the till says "Sorry, you can only have one." That's basically what happened with the initial public offering of Cara Operations Ltd.
The company, which is being taken public by its founding family and Fairfax Financial Holdings Ltd., owns a pile of restaurant chains like Harvey's, Swiss Chalet, East Side Mario's and Kelsey's, was priced and allocated Tuesday night. According to multiple sources close to the deal, it was at least 20 times oversubscribed.
So why the investor fervour, considering the restaurant business is hyper competitive, economically-sensitive and its customers notoriously fickle?
"From a Canadian IPO perspective, it took the levels of oversubscription to epic levels," marvels Kirby Gavelin, head of equity capital markets at RBC Dominion Securities.
"If you go back to the Tim Hortons IPO, Dollarama, BRP – all of them were significantly oversubscribed, but the Fairfax sponsorship and the effectiveness of the Cara management team in terms of telling that growth story really set a very solid foundation for investor demand on both sides of the border."
Cara was initially expected to come to market between $19 and $22 a share, but the company upsized the range to between $22 and $24 per share. Cara shares were ultimately priced at $23.
The company was founded by the Phelan family in 1883 as a seller of newspapers and confectionery to train and steamship passengers. Cara was a public company for 36 years but was taken private by the family in 2004 in a leveraged buyout. That transaction saddled the company with almost half a billion dollars in debt. To raise cash, Cara sold off a slew of its holdings, such as its airline catering and coffee businesses.
In 2012 the company acquired Prime Restaurants Inc. whose brands include Casey's and the Bier Markt for $69.6-million from Fairfax, who in turn helped recapitalize Cara with a $100-million investment and also became a major stakeholder.
The $200-million raised in the IPO will be used to pay down Cara's significant debt load of $278-million.
"There is a dearth of companies in Canada to invest in that are non-resource, non-material, non-financial and liquid," said Norman Levine, managing director with Portfolio Management Corp. a Toronto-based wealth management firm. "The scarcity value has really driven up the valuation."
Mr. Levine passed on the opportunity to participate in the IPO. He also objects to the company's dual-class share structure, with Fairfax and the Phelan family retaining multiple voting shares that entitle them to 25 votes, versus one for the subordinated voting shares that everyone else gets.
"I am strongly against subordinate voting shares or non-voting shares. I think it's wrong that my money isn't as good as the family's or Fairfax's money."
"Shareholders are not equal. Why should they [Fairfax and the Phelan family] be more equal than me? They'll come up with their argument that they want to keep control. Well, big deal. You want to keep control, put up some money."
Cara is due to start trading on the Toronto Stock Exchange under the symbol "CAO" on April 10.
With files from Jacqueline Nelson
This story corrects a previous version that incorrectly stated Kirby Gavelin is head of equities, however, his actual title is head of equity capital markets