The IPO for Jerry’s Deli: In a Pickle

Jerry’s Famous Deli serves more pounds of pastrami, rye and cabbage than ever before.

That’s why Isaac Starkman, who heads the fast-growing eatery chain, can’t understand why its stock, once worth more than $10, now sells for a mere $2.88 a share.

“This is not acceptable. This is not right,” said Starkman, pointing out that his Studio City-based firm’s sales rose 43% to $40 million in 1996 from 1995, and that cash flow rose 53% to $2.6 million.

So why has the stock, which trades on Nasdaq under the symbol DELI, fallen so far? Why aren’t investors, especially the large funds on Wall Street, interested in the popular chain of 24-hour eateries Starkman founded in 1978?

The story of Jerry’s Deli is an increasingly familiar tale of a troubled initial public offering. Jerry’s case illustrates how a small company can suffer from the ups and downs of the brokerage that takes it public--until the stock becomes nearly invisible in the market.

More broadly, Jerry’s case shows how risky it can be for a longtime, family-run restaurant chain to journey to Wall Street.

“Something happened in the markets that I still don’t understand, and we found ourselves with the stock sliding,” Starkman said. “There are market forces out there, but you don’t know what they are.”

Founded by Starkman and his partner, Jerry Seidman, the chain’s namesake who left in 1984, Jerry’s Deli tapped bank loans during its early years to finance its stores.

Then, in 1994, after the successful opening of a store in Marina del Rey and another near the Beverly Center shopping mall in Los Angeles, Starkman wanted to open more restaurants. He began contacting venture capitalists and investment bankers, including Robert DiMinico, who had just opened his own investment bank with an East Coast name and a Century City address: Boston Group.

DiMinico told Starkman that Boston Group could raise $4 million for the company through a private placement, and then raise even more by taking the deli chain public--selling stock to individual investors for the first time.

“I trusted him,” Starkman said. “He was talking my language, the language of an entrepreneur. He was starting his company and I was building mine.”

Jerry’s Deli went public in October 1995 at $6 a share, Boston Group’s first-ever IPO. A large chunk of the $14.5 million raised was used to open new restaurants in Westwood and Pasadena.

Investors seemed to like the stock: It soon climbed to $8. By August 1996, it had hit $10.37.

But then things began to turn. The stock began to slide last fall. Suddenly, in March, the bottom fell out, and the shares plunged from $4.50 to just above $2 in a matter of weeks--even though there was no change in the chain’s business.

What happened? Boston Group, the main supporter of the stock, abruptly saw its capital decline to such low levels that regulators forced it to suspend its “market-making” activities in March, meaning it could no longer stand by to buy stock from investors, or sell it to them, using the firm’s own capital.

Not just Jerry’s Deli, but all of the IPOs that Boston Group had underwritten quickly plummeted without the firm’s support as a market maker and promoter.

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DiMinico says Boston Group was a victim of “short sellers,” traders who try to hammer down what they believe are overvalued small-company stocks, in this case some of Boston Group’s IPOs. By using much of its capital in an effort to buy the shares the short sellers were dumping, Boston Group’s funds dwindled, and regulators stepped in.

But DiMinico quickly attracted new capital from outsiders, including former Goldman, Sachs & Co. analyst Joe Salvani. With a capital infusion, the firm was able to resume making markets in shares.

Yet Jerry’s stock has never fully recovered.

While Starkman still believes the IPO was the right thing to do for Jerry’s Deli, he advises other small-business owners to be careful when choosing an underwriter or making the decision to go public, stressing that it is much more complicated than they think.

“Anyone that does a new IPO probably is not aware of what can wait for them around the corner,” said Starkman, who advises entrepreneurs considering a public offering to be very careful selecting an investment banker.

“That’s the key thing. They should talk to 10 or 20 of them. Take six months. That process can save them a lifetime,” he said.

Now Starkman is trying to get the stock price back on track. He has hired an investor relations specialist to tell his story to Wall Street: Jerry’s is an undervalued company. (The chain, however, still generates very little in bottom-line profit, although sales and cash flow are rising.)

Starkman wants more analysts to follow his company, but he admits he didn’t talk much with the only analyst who had followed the firm--Barry King of Boston Group--and, in fact, couldn’t remember the analyst’s last name. King actually left Boston Group in May and was replaced with a new analyst, David Messinger.

But “I don’t know much about Jerry’s Deli,” Messinger said. “We’re trying to focus on higher-quality companies now.”

Still, Starkman is not deterred, touting the company’s expansion plans in Chicago, San Diego, Miami and the Bay Area. He recently brought in Kenneth Abdalla, a managing member of Waterton Management, an investment firm with ties to Ralphs and Food 4 Less, to spearhead Jerry’s growth.

For his part, DiMinico argues that Boston Group’s IPOs are depressed “at false levels” due to fear and will come back.

Despite the plunge in the stocks--and the losses investors have suffered--DiMinico says that what Boston Group does is essential to the California economy.

“We’re providing capital-raising for the most important part of the market, these tiny companies. That’s what makes this a great country--a company whose stock is at $3 a share can become a $350-million company.”