From “The Pied-Pipers of Wall Street: How Analysts Sell You Down the River” & #352;2001 by Benjamin Mark Cole, Published by arrangement with Bloomberg Press.

At first blush, the idea behind the Planet Hollywood restaurant chain didn’t seem so half-baked. With movies and television becoming the touchstone for a culture hollowed out by the imperatives of modern life, the nation seems to have a growing, insatiable appetite for all things Hollywood.

So, in the theme-oriented nuttiness of the dining-out trade of the mid-1990s, why not a restaurant based on celluloid? Why not a nationwide chain of outsized, movie-themed restaurants? Would not the masses, starved for some connection to the glamour of Tinseltown, pay real money to dine and buy souvenirs in a faux “Hollywood experience”? Actually, even a halfhearted amount of investigation and truth-telling would have given potential investors and analysts indigestion. For one thing, people seem to like to eat in theme restaurants just once, maybe twice. As a result, what are known as same-store sales that is, sales at existing branches (as opposed to newly opened ones) tend to decline over time at themed dining establishments. For another, only a handful of tourist cities worldwide could profitably support the huge dining emporiums that were constructed by Planet Hollywood.

These conceptual problems plagued Planet Hollywood almost from the start, but they were smothered by the hype and buzz that accompanied the chain’s launch in 1992. Stirring the PR pot were Planet Hollywood’s chairman and founder, movie producer Keith Barish, and its CEO, Robert Earl, a former top executive at the successful Hard Rock Cafe restaurant chain. As a result of their expert drumbeating, Planet Hollywood looked to be a financially sexy proposition, at least during the first course.

To be sure, the restaurants were very lively an uncharitable person might say they were loud the result of music systems turned high, the clank of cutlery and the dull roar of waitresses and patrons shouting to be heard. Some call this “eater-tainment.”

The walls of every Planet Hollywood restaurant were drenched with movie and TV memorabilia: a film poster from the 1940s, Sharon Stone’s ice pick from “Basic Instinct,” the actual sailor’s cap Bob Denver wore on the “Gilligan’s Island” television series. Video monitors hung hither and yon screened snippets from old movies.

Slavish media coverage

Then there were the house celebrities. In an effort to attract an A-list crowd, most trendy restaurants “comp” recognizable actors and actresses. Barish adopted the comp policy and put it on steroids: he enticed two dozen Hollywood stars to invest in the chain even before the IPO. The likes of Arnold Schwarzenegger, Whoopi Goldberg, Sylvester Stallone, Bruce Willis, Demi Moore and Cindy Crawford bought a cumulative 18 percent of the stock, which was offered to them at discount prices in return for their agreement to show up at the grand openings of new Planet Hollywood outlets. It was a brilliant ploy. Not only did the assembled star power reinforce the chain’s image as a Hollywood hangout, it also ensured that the media coverage for openings was terrific, bordering on slavish.

All this cost money, of course. The Planet Hollywood prospectus outlined that public relations costs were far higher than industry norms. Most diners noticed the food was a bit pricey and it was, as they were paying for a lot of overhead. As a private company (before going public), the Planet Hollywood chain borrowed more than $126 million to get rolling and spent millions more raised through private equity (pre-IPO sales of private stock).

In its first three years, the chain generated a steady flow of red ink. In 1995, it finally earned a reported $20.7 million on revenues of $270.6 million. That was the zenith for the chain and as later financial reports revealed, management either knew it or should have.

For one thing, same-store sales were sinking they would be down nearly 5 percent in 1996 (and fully 40 percent over the following three years). For another, although there were 30 Planet Hollywood restaurants around the world at the time the chain sold stock to the public, nearly half of the revenues were generated by four spots (Orlando, Las Vegas, Paris, and London). The remaining 26 restaurants were nearly deadweight.

Especially worrisome, the chain was already in all the best markets meaning that adding more spots would almost certainly prove a dead-end strategy. Unlike Denny’s or McDonald’s outlets, which can be sprinkled throughout a city, theme restaurants are so big and expensive that they are a one-to-a-big-city proposition a fact mentioned in Planet Hollywood disclosure statements.

Lots of buzz

Faced with declining same-store sales, glutted markets, an expensive business model, and new restaurants that burned the bottom line, what did Barish and Earl decide to do? What else? They decided to take Planet Hollywood public. Hire securities brokerage Bear Stearns & Co. to sell the chain to the public, and get your pre-IPO investors squared away.

“It will certainly be the spotlight stock for 1996,” enthused David Menlow, president of the IPO Financial Network Corp. “It’s going to be huge as far as investor reception.”

“It will go into orbit,” echoed then analyst Linda Killian of Renaissance Capital Corp. “It’s the name that will carry it.”

Perhaps more tellingly than he realized, Manish Shah, editor and publisher of the newsletter IPO Maven, added, “Planet Hollywood is going to be an extremely successful offering because a lot of retail investors will be interested.”

In a curious sort of symbiosis, Greg Novello, a portfolio manager for the Smith Barney Special Equities Fund (Smith Barney being one of the co-underwriters of the Planet Hollywood IPO) told The New York Times a few weeks before the offering that he planned to add the stock to his portfolio. “Obviously, it’s going to be a deal that gets a lot of press attention and publicity,” he explained.

The Planet Hollywood IPO prospectus oozed confidence about conquering such sexy cities as Tel Aviv, Boston, Tokyo, Bangkok, Seattle, Sydney and Berlin. In addition, Planet Hollywood executives spoke of launching another “eater-tainment” chain, the sports-oriented Official All-Star Cafe, which would garnish its walls with jerseys and basketballs and other athletic accoutrements. Athletes, not actors, would be the celeb hosts and investors.

By the time Planet Hollywood went public on April 22, 1996, the market had reached a boiling point, fired by smart public relations, friendly quotes from fund managers (many of whom worked for the underwriters), and a terrific road show conducted by Bear Stearns. (Michael Tarnopol, senior managing director and chairman of Bear Stearns’s investment banking division, would ultimately take a Planet Hollywood board seat.)

The IPO price was first set at $15 a share. Then, just before the offering, it was nudged up to $18. But that was small potatoes. On the very first trade, Planet Hollywood stock hit $31. As it would turn out, that was the zenith.

Tellingly, institutions began selling their shares almost immediately that first day. The stock wound up finishing its initial session at $26.88 down noticeably from its high, but still a sizzling 50 percent higher than the offering price. Volume was very heavy, with 22.6 million shares changing hands that first day at the time, a record for an IPO on the Nasdaq. It was also a sure sign the institutions were selling, since only institutions can lock up IPO stock in a hot underwriting.

Planet Hollywood shares were trading at about 140 times trailing (the previous year’s) earnings and roughly 70 times estimated earnings for 1996. That translated to a market capitalization of $2.9 billion, or a staggering $100 million or so for each of the 30 Planet Hollywood restaurants then in business. It had cost Planet Hollywood an average of $7.3 million to build and open each of its outlets, considered record-breaking sums at the time. In the initial public offering materials, Bear Stearns had posited that each Planet Hollywood was worth $66 million, or 10 times what it cost to build. Now, at the close of the first day of trading for the new shares, Wall Street said each one was worth $100 million.

Institutional payback

That was certainly sweet desserts for the Hollywood stars who had acquired pre-IPO stock. Their cumulative equity stake in Planet Hollywood became worth $537 million.

The IPO was also rewarding to Planet Hollywood’s early institutional backers, for it allowed many of them to get out of the company at a substantial gain. Of the $197 million that the IPO brought in, $66 million went to pay off a note held by a director of the company, while another $60 million went to pay off senior debt held by institutions. Additionally, institutional holders of pre-IPO Planet Hollywood stock such as Lincoln National Life Insurance, First Britannia Mezzanine Capital NV, Planetco Ventures Ltd., and Electra Investment Trust PLC sold their private shares into the IPO, reaping enormous profits as they bailed.

On May 14, 1996, four brokerages, all of which had managed or were lead syndicators in the Planet Hollywood IPO, issued “buy,” “outperform,” or “attractive” ratings on the stock. Smith Barney (now Salomon Smith Barney), Montgomery Securities (now merged into Banc of America Securities), Schroder Wertheim & Co., and, of course, lead underwriter Bear Stearns & Co. fell all over each other singing the praises of Planet Hollywood stock.

First up was Joseph T. Buckley, Bear Stearns’s top research analyst for restaurants. His panegyric was subtitled in part, “Planet Hollywood: A High-Volume Growth Machine.” At the time Buckley issued his 19-page report, Planet Hollywood was trading at $26 a share. That’s 51 percent higher than its IPO price.

Nonetheless, Buckley rated the stock “attractive” (the equivalent of a “buy” recommendation). He touted Planet Hollywood’s ability to market not just food but merchandise, the sales of which Buckley predicted would reach fully half of total revenues “within the next few years.” No other restaurant chain had ever sold so much in apparel and knick-knacks, but Buckley predicted it anyway.

This was a parroting of Earl’s ill-defined vision of a populace buying different kinds of Planet Hollywood branded products, as consumers came to identify with a restaurant-chain-inspired lifestyle. Just why consumers would buy Planet Hollywood cooking tongs or expensive leather jackets instead of ones bearing a recognized culinary or apparel label was never explained.

But Buckley knew there was trouble in paradise. In his report, he noted that same-store sales “were down 4.6 percent in the first quarter of 1996.” He attributed the weakening sales to “bad weather.” How bad weather could affect a chain operating in 30 different cities on several continents he did not say.

And despite the fact that the chain had constructed only one All-Star Caf & #233;, which Buckley called crucial to its growth plans, he predicted that Planet Hollywood earnings would be up by 83 percent in 1996, followed by a 57 percent jump in 1997. After that, they would settle down to 30 to 35 percent annual growth.

Buckley’s report amounted to hardly more than a saccharin-laced version of the IPO prospectus Planet Hollywood and Bear Stearns underwriters had filed with the SEC. Conspicuously absent was any recognition that Planet Hollywood restaurants cost considerably more to operate than similar-sized competing restaurants. Nor did Buckley mention that some large pre-IPO investors had exited Planet Hollywood in the IPO, or that most of the money raised in the IPO had gone to repay debts.

Star struck

Buckley was hardly alone in his ringing praise. Analyst John J. Rohs, then of co-managing firm Schroder Wertheim & Co., also initiated coverage with a positive recommendation (in his case, an “outperform” rating), citing the same roll call of supposed virtues.