As Private Equity activity continues to flourish in the foodservice sector, restaurant valuation multiples have followed suit — rising even when deal volumes drop. Premiums for high-quality targets are on the rise, with valuations reaching their highest multiple (11.1x) since 2007 in 2016.
There are plenty of opportunities for restaurant operators searching for capital — particularly those in higher growth markets. In global Private Equity markets, dry powder (marketable securities that are highly liquid and therefore considered cash-like) is reaching new heights, as the number of closed deals falls short of demand. Undeployed capital in the restaurant industry is no exception, and investors often fail to find the right opportunities.
Valuation multiples (which help investors decide whether to enter or exit a stock) are affected by a company’s perceived growth, risk and uncertainties, and investors’ willingness to pay. Now, more than ever, they seem willing to pay a lot.
Mergers and acquisitions activity has been relatively robust, spurred by the drivers of a healthy deal-making environment, like high equity markets, investor confidence, and favorable credit markets. For an investment banker or someone trying to sell a restaurant company, high multiples provide a basis for pricing a business at a premium while lower multiples offer a filter to find assets that might be undervalued.
Global reserves of private equity funds continue to increase, reaching a record high of $1.37 trillion in 2016. Dry powder has grown during the last two years at an average rate of 8.8% (making investors anxious about finding investment prospects). We’ve seen a number of high restaurant valuation multiples as a result of this dry powder. The median EBITDA multiple for US targets this year sits at 15.7 times EBTIDA — a massive spike to say the least. But some deals have gone even higher. When Private Equity firm The Abraaj Group invested in Saudi Arabian quick service restaurant brand Kudu, it was rumored to have paid 22 times the company’s earnings.
In many cases, restaurant valuation multiples are partially generated through a brand’s story. Shake Shack shares trade at a valuation of 26 times enterprise value to 2017 EBITDA — versus its peer group at 14 times, for instance.
Valuation multiples for publicly traded foodservice companies have decreased for all segments (except QSR) since 2013. Despite that, the Coffee/Snacking segment continues to hold the highest valuation (10% higher than QSR). This long-term trend may be starting to change, though, with the Coffee/Snacking, QSR, Specialty Casual, and Fine Dining segments seeing slight increases in EV/EBITDA this year when compared to last.
In other words, investment into restaurants is starting to mirror the writing on the wall: investors are pulling back from Casual Dining chains and moving increasingly toward QSR — just as many diners have. Those with a unique concept in a growth market will be most likely to see investment; though this also means that valuations for many CDRs are lower, making for prime investment opportunities with the right turnaround plan (though this is obviously not true for all CDRs).
Among public foodservice companies in the US, large-caps tend to have higher valuations (15.2x the median) than mid-caps (25% lower valuation) and small-caps (38% lower valuation). Some of the most prominent foodservice companies in the world also have a dominant presence on stock exchanges. The market cap of McDonald’s, for instance, is much greater than that of other large foodservice leaders in 11 other countries.
The below map shows valuations for some of the biggest foodservice companies in the globe. Hna-Caissa Travel Group, listed in the Shenzhen Stock Exchange, has the highest valuation (34.4x EV/EBITDA ratio), while on the other extreme Italian-based Autogrill has a valuation ratio of 5.9x.
US restaurant valuation multiples are 5.5% above the global average, only surpassed by India, which has valuations 21% higher than the US. It’s especially noteworthy considering 25% of the world restaurant & dining public companies are in the US, while only 2% are in India.
Valuations for Indian foodservice companies are 42% above the market average for that country. Similarly, Japanese foodservice companies have an EV/EBITDA ratio 30% higher than the market average (excluding financial companies). On the other hand, foodservice companies in China have a valuation ratio 35% lower than the market average.
Valuation multiples for hospitality and related public companies in the GCC are not consistently above/below their market medians. On the one hand, companies like Tourism Enterprise and AL Hokair Group (both from the KSA) have EV/EBITDA values higher than the median of those in the KSA. On the other hand, Al Dar Properties (UAE) and Kuwait Food Co. (Americana) are well below the median valuation for their respective markets.
Among foodservice public companies in some of the most important markets in Europe, American-based companies (like Yum! Brands, McDonald’s, and Domino’s Pizza) have some of the highest EV/EBITDA multiples. On the other end of the spectrum, Restaurant Group, Bravo Brio, and Punch Tavern have the lowest valuation ratios.
Over the years, the average restaurant valuation multiple has slowly crept up, now hovering somewhere around 10.4x. In the last few years, there have been some changes in valuations of public companies across markets. The valuation ratio EV/EBITDA for emerging markets went from being the highest in 2013 to the lowest of all the regions considered by the end of 2016.
In the last two years, the rank of EV/EBITDA has been unaltered, with US restaurant companies on the high end and emerging markets in the low end of valuations. Wall Street cheered when McDonald’s announced the sale of 80% of its operations to a consortium led by China’s CITIC and the private equity firm Carlyle for $2.1 billion in 2017. Analysts speculated that the sale could eventually result in boosting the stock’s price-earnings multiple and expanding McDonald’s margins significantly.
For announced transactions in 2017 so far, restaurant multiples saw a modest increase from 0.9x revenue in 2016 to 1.3x revenue. Deals like these illustrate the strength of restaurant transaction activity and a future that will prove favorable to valuation trends.
In the 12 months leading up to June 2017, we’ve noted EV/EBITDA ratio trends in the US diverging depending on the segment: QSR, Cofee/Snacks, Franchises, Specialty Casual, and Fine Dining public companies are in an increasing trend, while Mass Casual and Polished Casual are decreasing. Despite the fact that some operators have suffered in recent months, the evolution of restaurant valuation multiples signifies that there are still bountiful opportunities for investors in the segment.
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, commercial due diligence for emerging restaurant chains and prestigious private equity firms. Aaron has personally lead boots-on-the-ground assignments in 68 countries for clients ranging from startups to multinational companies posting in excess of $37 billion. Collectively, his clients around the globe generate over $100 billion annually and span six continents and more than 100 countries.