Running Header: IPO Assignment: Dunkin’ Brands Group, Inc.

Dunkin’ Brands Group, Inc.

FI516- Advanced Financial Management

August 12, 2012

Introduction
The company chosen for this assignment is Dunkin' Brands Group, Inc. (NASDAQ: DNKN). With approximately 16,800 points of distribution in nearly sixty countries worldwide, Dunkin' Brands Group, Inc. is one of the world's leading franchisors of quick service restaurants (QSR) serving hot and cold coffee and baked goods, as well as hard-serve ice cream. Its franchised business model comprises 9,760 Dunkin’ Donuts restaurants and 6,433 Baskin-Robbins restaurants. Dunkin’ Brand’s competitors include: 7-Eleven, Burger King, Cold Stone Creamery, Dairy Queen, McDonald’s, Quick Trip, Starbucks, Subway, Tim Horton’s, WaWa and Wendy’s, among others (Google Finance, 2012). Additionally, Dunkin’ Brands competes with other QSRs, specialty restaurants and other retail concepts for prime restaurant locations and qualified franchisees. As of December 31, 2011, it had 10,083 Dunkin’ Donuts restaurants in 36 states, the District of Columbia, and 31 other countries; and 6,711 Baskin-Robbins restaurants in 44 states, the District of Columbia, and 48 other countries. The company also leases restaurant properties. With approximately 120 years of combined history Dunkin’ Brands Group, Inc. is headquartered in Canton, Massachusetts (Yahoo Finance, 2012). According to its SEC Filings both of its brands have a rich heritage dating back to the 1940s, when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Both Baskin-Robbins and Dunkin’ Donuts were individually acquired by Allied Domecq PLC in 1973 and 1989, respectively. The brands were organized under the Allied Domecq Quick Service Restaurants subsidiary, which was renamed Dunkin’ Brands, Inc. in 2004. Allied Domecq was acquired in July 2005 by Pernod Ricard S.A. (Dunkin’ Brands Group, Inc. 2011). Pernod Ricard made the decision to divest Dunkin’ Brands in order to remain a focused global spirits company. As a result, in March of 2006, Dunkin’ Brands was acquired by investment funds affiliated with Bain Capital Partners, LLC, The Carlyle Group and Thomas H. Lee Partners, L.P. (collectively known in the report as, the “Sponsors”) through a holding company that was incorporated in Delaware on November 22, 2005, and was later renamed Dunkin’ Brands Group, Inc. (Dunkin’ Brands Group, Inc. 2011).
Associated Risks
The Company's business, financial condition, results of operations and cash flows are subject to various risks. According to its 10-K report, Dunkin’ Brands is organized into four reporting segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International (Dunkin’ Brands Group, Inc. 2011). The Company generates revenue from four primary sources: (i) royalty income and franchise fees associated with franchised restaurants, (ii) rental income from restaurant properties that we lease or sublease to franchisees, (iii) sales of ice cream products to franchisees in certain international markets, and (iv) other income including fees for the licensing of our brands for products sold in non-franchised outlets, the licensing of the right to manufacture Baskin-Robbins ice cream sold to U.S. franchisees, refranchising gains, transfer fees from franchisees, revenue from our company-owned restaurants, and online training fees (Dunkin’ Brands Group, Inc. 2011). As indicated, a substantial majority of the company’s revenues are in the form of royalties, which are generally based on a percentage of gross sales at its franchised restaurants, rent and other fees from its franchisees. For that reason, Dunkin’ Brands’ financial results are to a large extent dependent upon the operational and financial success of its franchisees. If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, and royalties, rents and other revenues may decline, and their accounts receivable and related allowance for doubtful accounts may increase. Also, if franchisees fail to renew their franchise agreements, the company’s royalty revenues may decrease which in turn could materially and adversely affect the business and operating results (Dunkin’ Brands Group, Inc. 2011). Dunkin’s success is also dependent in large part upon its ability to maintain and enhance the value of its brands, its customers’ connection to its brands and a positive relationship with those franchisees. According to the SEC filings the brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation (Dunkin’ Brands Group, Inc. 2011). The business environment (including industry, market, sourcing, competition and operations), tax, acquisitions, legal (including product liability), financial, regulatory and investment risks, and has established a formal process for continuous review of such risks. As the financial report indicates Dunkin’ Brands’ substantial indebtedness could also adversely affect its financial condition. Specifically, the company’s high level of debt could have important consequences, including but not limited to: • requiring a substantial portion of its cash flow to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes; • increasing the company’s vulnerability to adverse changes in general economic, industry and competitive conditions; • exposing the company to the risk of increased interest rates as certain of its borrowings, including borrowings under the senior credit facility, are at variable rates of interest; • limits on its flexibility in planning for and reacting to changes in the industry in which the company compete; • placing Dunkin’ Brands at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates; and • increases in Dunkin’ Brands’ cost of borrowing (Dunkin’ Brands Group, Inc. 2011).
Financials
Despite the risk factors, Dunkin’ Brands; believes that its guiding principles and benefits of its current growth strategy outweigh the risks along with its experienced management team focused on disciplined and profitable growth by franchisees and Dunkin’ Brands commitment to strong long-term earnings growth and cash flow generation with an asset-light business model (Dunkin’ Brands Group, Inc. 2011). In terms, of how the business is fairing overall, the company has a debt-to-total capitalization ratio 1.95 and a Current Ratio of 1.3 indicating that the company is not liquid enough and may have problems paying out its financial obligations when they are due. As the market goes up, the Dunkin’ Brands Group, Inc. is expected to underperform (Macro Axis 2012). Other key financials include:
Dunkin’ Brands Group, Inc. does not issue Preferred Stock.

Dunkin’ Brands Group has a current capital structure is a mix of the company's long-term debt, specific short-term debt, common stock. It is as follows: • Long-term: $1,458,272 • Short-Term debt: $15,197 • Common Stock Outstanding: 123.21M shares, with a par value of $.01
Market value of Common stock as 12/31/2011: $24.62
Dunkin’ Brands Group, Inc. Marginal Tax Rate: 40%
Since the company does not issue Preferred stock, the Cost of Preferred Stock is $0
Price Earnings Multiple: Market Value per Share/Earnings per Share (EPS)
Price Earnings Multiple = $24.62/.43
Initial Public Offering
In July 2011, Dunkin’ Brands Group, Inc., parent company of Dunkin Donuts, filed for an Initial Public Offering of 22,250,000 shares of its common stock at a price of $19 per share. The Company's shares are being traded on The NASDAQ Global Select Market as July 27, 2011 under the trading symbol “DNKN” (Dunkin’ Brands Group, Inc. 2011). The company said it planned to use the proceeds to pay down $475 million in debt (DealBook 2011, May 4). Dunkin’ Brands made its stock market debut with shares soaring at 46.6 percent on the first day of trading (Rusli 2011, July 29). The underwriters, led by JPMorgan Chase, Barclays Capital, Morgan Stanley, Bank of America Merrill Lynch and Goldman Sachs, made $27,478,753 million in fees and according to Market Watch, the company sold 22.5 million shares of common stock in its IPO, resulting in net proceeds to the company of approximately $390.0 million, after deducting underwriter discounts and commissions. Regrettably, little of those monies were available for the Company’s working capital purposes, as $375.0 million went to retiring the Company’s outstanding debt (Market Watch 2011, September 15). Stock in Dunkin’ Brands (NASDAQ: DNKN) soared 34% after an initial public offering in July 2001 at $19 a share, driven by investor optimism on the coffee and doughnut chain’s growth potential in markets beyond the East Coast. Yet, a weighted down balance sheet with significant indebtedness proved to be an obstacle to the Company’s expansionary strategy (Market Watch 2011, September 15).
Secondary Offerings
Following their going public in 2011, Dunkin' Brands Group, Inc., the parent company of Dunkin' Donuts and Baskin-Robbins, announced in early November 2011 that there would be an offering by a number of its stockholders in the amount of 22 million shares of its common stock at a price of $25.62 per share. In addition, their underwriters had been granted a 30-day option to purchase up to an additional 3.3 million shares from certain of the selling stockholders (Dunkin’ Brands Group, Inc. 2011). Also, in late March 2012 the company announced that there would be a second secondary public offering by a number of its stockholders in the amount of 26.4 million shares of common stock at a price of $29.50 per share. At that time, the underwriters were granted a 30-day option to purchase up to an additional 3.96 million shares from certain of the selling stockholders. The selling stockholders in both offerings received all of the net proceeds from this offering. No shares were sold by the Company (Dunkin Brands Group, Inc. 2012). Since the initial public offering in July 2011, the price of Dunkin’ Brands’ common stock, as reported by NASDAQ, has ranged from a low of $23.24 to a high of $36.59. The stock market in general has been highly volatile. As a result, the market price of Dunkin’ Brands’, as the company presents, common stock is likely to be similarly volatile, and investors in their common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to Dunkin’ Brands operating performance or prospects, and could lose part or all of their investment (Dunkin Brands Group, Inc. 2011). Despite this fact, Dunkin’ Brands is reporting strong performance that underscores long-term growth opportunity across its brands (Dunkin Brands Group, Inc. 2012). The Company’s current plans are to: • Drive growth and increase penetration in established markets (Japan, Korea and Middle East).

• Leverage brands’ strengths to grow in high-potential markets. • Utilize domestic marketing/innovation strength to grow awareness globally and localize brands’ offerings.

• Further develop franchisee support infrastructure by adding operations, marketing, and supply chain resources.

Bibliography

DealBook (2011, May 4). Dunkin’ Donuts Parent Files for and I.P.O. The New York Times DealBook. Retrieved from http://dealbook.nytimes.com/2011/05/04/dunkin-donuts-parent-files-for-an-i-p-o/?pagewanted=print

Dunkin’ Brands Group, Inc. (2012, June). Second Quarter 2012 Investor Presentation, Retrieved August 11, 2012 from http://investor.dunkinbrands.com/events.cfm

Dunkin' Brands Group, Inc. (2012, March 30). Dunkin' Brands Group, Inc. Announces Upsizing and Pricing of Secondary Offering, Retrieved August 7, 2012 from http://files.shareholder.com/downloads/ABEA-68SCR9/2009421793x0x556512/80f04b63-0208-44c4-9327-099c7cd198c7/DNKN_News_2012_3_30_General_Releases.pdf

Dunkin’ Brands Group, Inc. (2011). 10-K Annual Report 2011. Retrieved August 8, 2012, from SEC EDGAR website.

Macro Axis. (2012). Dunkin’ Brands Group, Inc., Retrieved August 11, 2012 http://www.macroaxis.com/invest/market/DNKN--Dunkin_Brands_Group_Inc

Market Watch (2012, August 10). Dunkin' Brands Group Inc., Retrieved August 10, 2012 from http://www.marketwatch.com/investing/stock/DNKN/profile

Market Watch (2011, September 15). Dunkin’ Donuts Problems Rise, Retrieved August 9, 2012 from http://www.marketwatch.com/story/dunkin-donuts-problems-rise-2011-09-15

Rusli, E. (2011, July 29). How Sweet It Is: $27 Million in Fees for Dunkin’s Underwriters, Retrieved August 9, 2012 from http://dealbook.nytimes.com/2011/07/29/how-sweet-it-is-27-million-in-fees-for-dunkins-underwriters/

Seeking Alpha. (2011, July 25).IPO Preview: Dunkin' Brands Group, Retrieved August 7, 2012 from http://seekingalpha.com/article/281550-ipo-preview-dunkin-brands-group

Yahoo Finance. (n.d.). Dunkin’ Brands Group, Inc., Retrieved August 7, 2012 from http://finance.yahoo.com/q/pr?s=DNKN