Domino’s grew its revenues and earnings under Bain, but its debt also surged to $1.5 billion, leaving the chain with a higher debt ratio than most of its rivals, and interest payments that eat up half its profit each year.
On the campaign trail, Romney, who left Bain in 1999, counts Domino’s among his corporate success stories, saying it has grown and paid off for investors. But the company also was left with greater risk than before, and must count on its franchisees to deliver a steady stream of cash to cover the debt.
“They’re much more highly leveraged than any of their competitors,’’ said Edith Hotchkiss, a professor of finance at Boston College’s Carroll School of Management who has studied the effects of private equity on businesses. “Companies were able to borrow at that level only just before the financial crisis.’’
High levels of debt don’t always lead to problems, but they can when the economy slows or the company stumbles. In the classic private equity model, Bain set out to improve Domino’s, with the expectation that it would generate plenty of money to make payments on its debt.
To buy Domino’s, Bain put up a third of the money in cash and borrowed the rest. It took money out in several chunks including: a 2003 refinancing of the company’s debt, a 2004 initial public stock offering, and an $897 million “monster dividend’’ paid to Bain and other investors in 2007. In each instance, the company borrowed money or refinanced old debt to make the payouts.
Romney’s political rivals have attacked him for a number of deals during his tenure at Bain Capital where the companies went bankrupt, sometimes after Bain cashed out. And while Bain says it makes companies run better, Hotchkiss says part of that is sheer pressure: Companies with high levels of debt have to generate profits and be careful with costs, or risk bankruptcy.
