Learning from the Locusts: "Newly Discovered Financial Tool" Powers Buybacks, Dividends for Multinational Pizza Chain
Domino's Pizza, the US-based pizza delivery giant with operations in 55 countries, claims to have discovered a new financial tool: heavy leverage to fund share buybacks and dividends.
Domino's worldwide sales last year exceeded USD 5 billion (of which nearly 2 billion were outside the US) through some 8,400 franchised operations.
Between February and April this year, Domino's recapitalized by securitizing USD 1.85 billion in debt through the subsidiaries which generate the bulk of the company's cash flow, i.e. royalties and brand names. The debt package pushed the company's debt to free cash flow ratio up to nearly 7 to 1, and was used to fund a USD 13.50 per share special dividend to shareholders. In addition, according to Domino's, "The Board of Directors approved an open market share repurchase program of $200 million of the Company’s common stock, which will be funded by future free cash flow and if determined appropriate, a portion of the borrowings available under the $150 million of variable funding senior notes portion of the securitized debt facility."
Speaking to the Financial Times, CEO David Brandon declared "I think the equity markets have new found respect for the way the use of a balance sheet can drive shareholder value", adding “I don’t view it as anything other than a newly discovered financial tool for some industries that never before recognised the opportunity.”
The "new financial tool", however, bears an astonishing resemblance to…the financing of a leveraged buyout. Considering that Domino's was taken private for 6 years by a private equity group headed by Bain Capital, the resemblance is hardly coincidental.
The only novelty was in marrying the massive use of cheap credit with the advantages of a multinational franchise system centered on royalties and copyrights, with few employees and little fixed overhead. Of the 1.85 billion in securities, 1.6 billion was insured and given a AAA rating.
CEO Brandon told the FT that he expected similar companies to go down this financial path. Multinational food processors, moving towards becoming "virtual corporations" uniting flexible subcontracted production networks through their brand portfolios, could also be tempted - provided the capital markets maintain their appetite for high levels of debt at a time when the buyout business is headed for a fall.
“My job is to reward my investors today, and that’s why we did what we did,” Brandon told the FT.
Domino's workers have yet to see the rewards. On July 26, the T&G section of the UK union Unite reported that 15 Hungarian migrants at a Domino's franchise in Derby had received virtually no pay for months due to illegal deductions for accommodation and "insurance", with one driver earning just 5 pounds in four months. In the UK, company profits in the first 6 months of this year rose by 35 per cent to GBP 8.3 million.