Mitt Romney and Bain Capital: LBOs to IPOs, Two Case Studies

In this year’s presidential contest, leveraged buyout firms are getting heat from Democrats and a contingent of Republicans led by Newt Gingrich. Republican candidate Mitt Romney is the target because of his former employer and current income source, private equity manager Bain Capital, a leading LBO practitioner.

What sets LBO firms apart from normal contrarian investors is their ability to attract massive amounts of debt, with the help of prominent rainmakers such as Romney, to gear up their equity investments in fledgling or distressed companies. Typically, the payday for LBO investors occurs when the company they sponsored is sold to another LBO firm or placed in the public market through an initial public offering.

In considering shares of a post-LBO company now listed on a stock exchange, the main question is, what has all the debt leverage wrought after the LBO managers scored their fees and dividends? Among the offspring of Bain Capital, like all private LBO firms, the answer is mixed.

One Bain baby now trading shares on the public market is Steel Dynamics (STLD), an Indiana producer of carbon steel founded by three steel industry veterans in 1993. Bain took an early stake in Steel Dynamics, which defied the odds and became a successful upstart in a mature industry with enormous fixed capital costs.

When Bain and the other private investors took the company public in 1996, the company’s long-term debt to equity ratio was 2.7. That is, debt outweighed equity by nearly 3-to-1. At the end of 2011, the ratio was 0.8, well inside its peer group range.

Steel Dynamics Debt to Equity Ratio Chart by YCharts

Returns to investors track nicely with its bigger competitors, such as Nucorp (NUE).

Steel Dynamics Return on Invested Capital Chart by YCharts

Steel Dynamics 2011 results, including a 98% increase in net income over 2010 and a 27% gain in sales. Its dividend yield is topped only by Nucor.

Steel Dynamics Dividend Yield Chart by YCharts

Another picture is painted by Dunkin’ Brands Group (DNKN), a Bain offspring that is best known for its donuts, coffee and ice cream (Baskin Robbins). Dunkin’ Brands went public last August at $19 a share in an IPO of 22.5 million shares. The IPO was staged by its owners, Bain Capital, Carlyle Group and Thomas H. Lee Group, which retain majority control. The stock soared 47 percent on its first day of trading. A secondary offering of 22 million shares was priced at $25.62.

The enthusiasm for the stock last summer came despite a 23% drop in 2011 net income, the last full year of its private ownership status. Last September Goldman Sachs, an underwriter of the IPO, issued a “sell” rating, saying that Dunkin’s early price gain was way overdone.

Dunkin’ Brands has stumbled from a high of nearly $32.

Dunkin' Brands Group Stock Chart by YCharts

Before the IPO, Dunkin’s IPO sponsors paid themselves a $500 million dividend. No dividend is planned for the new public stockholders. As of its third-quarter 2011 last September, Dunkin’s long-term debt/equity ratio was 2.0, compared to 0.9 at McDonald’s (MCD) and 0.1 at Starbucks (SBUX).

Dunkin' Brands Group Debt to Equity Ratio Chart by YCharts

Dunkin’s coffee is great, but at $26 this LBO offspring still needs some cooling off.

Bill Barnhart is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.