McDonald's Franchisee Goes Public

The largest McDonalds’ franchisee south of the U.S. border went public on April 14, 2011.  Arcos Dorados Holdings listed itself on Wall Street using the symbol ARCO.  ARCO operates or sub-franchises 1,755 units in Latin America.

McDonald's is the dominant fast-food brand south of the border.  ARCO’s same-store sales grew 15 percent last year, making it a growth company.  The new publicly held McDonalds franchisee initially priced its 62.5 million-share offering at $13 to $15 a share.  Demand was so heavy for the IPO, however, that it upped the share price to $17 and offered 73.5 million shares

The IPO puts ARCO’s current valuation at $3.6 billion, and 34 times net income. The company’s investors paid $700 million in 2007 for McDonald’s Latin America rights.  McDonald's itself, by comparison, trades at about 16 times net. The stock's price quickly grew past $20 on its first day of trading in what was by all accounts a successful IPO.

In other words, over time, Arcos could very well see its value decline as investors realize that, despite its immense size and growth market, it does not have the brand control enjoyed by the parent McDonalds Corporation. Of course, the ARCO IPO indicates solid Wall Street excitement about the McDonalds brand.

This event raises a more general question:  should investors, as with this McDonald's franchisee, look into buying franchise-operating entities for good returns?  In addition, should franchise buyers look at other public operating entities to provide clues as to the profitability of any franchise investment?

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