Restaurants Mergers and AcquIsitions Q3 Update

Q3-2018 Restaurant Mergers and Acquisitions Update

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Already in 2018, $1.5t has changed hands in mergers and acquisitions in North America and Europe. In foodservice, the number of deals is comparable to the first three quarters of 2017, and valuations remain in the 10x EBITDA range.

The trends most impacting Q3-2018 restaurant mergers and acquisitions are:

  • Consolidation: from small restaurant groups like ARC to giants like MTY, many portfolios are making a number of acquisitions very quickly.
  • Going private: more and more companies are leaving the stock exchange to stage turnarounds or expansions away from the pressure of quarterly earnings reports.
  • Authentic, healthful concepts: a number of on-trend chains are turning to minority investors to expand.
  • Convenience: foodservice tech remains hot, as top players are using buyouts and minority investments to try and claim market share.
US Restaurant Mergers and Acquisitions Q3

Mergers and Acquisitions Across Sectors Reaching Record Sizes

Record-breaking mergers and acquisitions are taking place in all sectors. Over the last decade, deal size has almost doubled in North America and Europe, with platform buyouts more than tripling in size since 2009.

Though the pace of activity has decelerated (by 7% in North America and 19% in Europe), there’s still plenty of capital (and concepts) changing hands. In the first half of 2018, deals totaled $512b in Europe and $956b in North America.

Empires Are Rising

The Q3-2018 restaurant mergers and acquisitions landscape saw a handful of small restaurant groups go on buying sprees. ARC, founder of Dick’s Wings & Grill, bought the struggling Tilted Kilt in June, and in August, it announced its acquisition of Fat Patty’s, a four-unit casual-dining chain. While ARC depends on franchisors to grow its concepts’ footprints, Elite Restaurant Group will expand its concepts with corporate-owned locations. In April, the Los Angeles–based Elite announced its acquisition of Daphne’s, a Mediterranean concept with 23 units in California. Since then, it’s already shortened the name, updated the menu, and launched remodels. In August, Elite purchased Patxi’s Pizza. Meanwhile, Sinelli Concepts, out of Dallas, added the 45-unit gelato concept Paciugo to its 438-unit Which Wich brand. Sinelli also owns Burguesa Burger, with two units, and will debut its new concept, Supernova Coffee, by the end of 2018.

These deals might be the beginnings of new restaurant empires, but ARC, Elite, and Sinelli have a long way to grow before they can rival the two of the undisputed giants in global foodservice: MTY Group and JAB Holdings. With almost 75 brands, MTY Food Group is a major force in North American foodservice. Specializing in franchised concepts with units in malls, movie theaters, and convenience stores, the concepts in MTY’s portfolio have over five-thousand locations. From Chinese and Japanese cuisine to burgers, sandwiches, and snacks, MTY most recently added sweetFrog, a self-serve frozen yogurt concept with almost 300 units, most of which are in the U.S.

Restaurant Mergers and Acquisitions Q3 JAB

Through its subsidiary Krispy Kreme, JAB acquired Insomnia Cookies in July 2018. It also added Core Nutrition, a bottled water company, thanks to a purchase by Keurig Dr Pepper. JAB’s dominance in the beverage sector may have prompted Coca Cola’s $5b+ purchase of Costa Coffee, a U.K.-based coffee house with over three thousand locations worldwide. The acquisition not only gives the soda company entry into the fast-growing coffee category, but it also provides essential brick-and-mortar locations that will get more Coke products in front of more consumers.

JAB and MTY concentrate on specific kinds of foodservice operations, but they are both pursuing the same strategy: consolidate a category. These kinds of initiatives require long-term planning, which often conflicts with the short-term demands leaders of public operations must face. This helps explain why we’re seeing so many public companies go private.

Private Companies Avoid the Most Common Pitfalls of Short-Termism

When Ron Shaich announced his resignation as CEO of Panera Bread, he explained that he wanted to “really push this debate… about how short-termism has infused our capital markets.” The focus on short-term results, he went on, “stops innovation. It stops the very things that drive economic growth. And it makes us less competitive as an economy.” This is why Shaich took Panera private: so the company could focus on more complex, long-term strategies like digital integration that may reduce more immediate payouts but can significantly increase future returns.

Restaurant Mergers and Acquisitions Q3 Shaich

Shaich’s harsh words for the industry have made the merger between Zoës Kitchen and Cava, financed by Shaich’s Act III, huge news. The two Mediterranean concepts will have a combined footprint of 327 stores. Though Zoës has struggled with declining traffic, especially in regions where over-expansion resulted in self-cannibalization, Shaich’s involvement in this deal signals that the chain still has a lot of potential.

Zoës is one of nine public restaurants to have gone private in the last two years. Together, they represent $14.4b.

Restaurant Mergers and Acquisitions Q3 Public Private

Jamba Juice and Sonic both announced deals to go private this quarter. Jamba has been under pressure since two activist investors (Glenn Welling of Engaged Capital and James Pappas of JCP Investment) took board seats in 2014. Now Focus Brands, owned by Roark Capital, has taken the company private, adding it to its other snack concepts, which include Auntie Anne’s and Cinnabon.

Inspire Brands, another multi-concept portfolio under the Roark umbrella, acquired Sonic for $2.3b. It adds the drive-in burger concept to an empire that already includes Arby’s and Buffalo Wild Wings. The group has a proven track record for bringing back struggling concepts: since the Arby’s turnaround began in 2013, the roast beef chain has increased sales by 20%. CEO Paul Brown focused on making the brand more appealing for young people: social media became less corporate, more emphasis was put on high-quality ingredients, and stores were remodeled (which also helped with efficiency). Similar changes may be in store for Sonic, even though it has faced fewer difficulties than Arby’s. Like Shaich, Brown is focused on longer-term strategy.

Restaurant Mergers and Acquisitions Q3 Arbys BWW Sonic

Minority Investments Funding Expansion and Technology

A number of minority investments have taken place already this year, with the much of the activity directed toward expanding operations. There has also been consolidation among franchisors and a few notable tech investments.

Many of the chains taking on investments to expand are in close alignment with larger consumer trends. Roti Modern Mediterranean received $20m from Valor Equity Partners. This deal is more evidence that the Mediterranean segment will gain market share in the coming years. Dobbs Equity Partners invested an undisclosed sum into Corky’s BBQ, which currently has eight locations across Tennessee, Mississippi, and Arkansas. Its claim to authentic Memphis barbeque gives guests a strong sense of place. Meanwhile, vegan concept by Chloe took on $31m from a variety of investors to open 20 new locations, highlighting the increasing popularity of plant-based diets.  

The second-largest category of minority investments took place in technology. It’s been a busy year for tech mergers and acquisitions as foodservice-focused companies continue to consolidate. This quarter, Grubhub bought the loyalty program LevelUp for $390m. The platform should allow the delivery company to better integrate with client restaurants’ POS systems, reducing friction in the ordering process and offering more opportunities for direct engagement between guests, Grubhub, and individual restaurants.

Restaurant Mergers and Acquisitions Q3 Delivery Technology Companies

Grubhub isn’t just buying; it’s also taking on investment. Yum! Brands made news in February 2018, when it put $200m into the delivery platform, the largest investment made into a third-party tech company by a foodservice operation. But competitor Doordash claimed more than twice that figure the same month in a funding round led by SoftBank Group.

While Doordash and Grubhub are fighting for control of the delivery market, start-up Ordermark is trying to help restaurants make sense of the crowded market. Its products centralize orders from all the major delivery platforms through a single dashboard and POS. The company received $3.1m in seed capital in March 2018 and an additional $9.5m in September, which it plans to use to go national.

We support with both sell-side mandates and middle-market buy-side advisory for restaurant industry investments.

Acquisitions Reveal Strategic Moves to New Categories

After acquiring Barteca in May 2018, Del Frisco’s has sold Sullivan’s Steakhouse to Romano’s Macaroni Grill for some $32m. Sullivan’s had been experiencing a serious decline in traffic, and Del Frisco’s had been considering a sale since 2016. These two deals show Del Frisco’s understanding of changing consumer desires: Bartaco, the larger of the two concepts under the Barteca umbrella, is in the faster-growing fast-casual segment.

Meanwhile, the tumultuous meal-kit segment saw more changes thanks to Q-3 2018 restaurant mergers and acquisitions activity. True Food Innovations, which focuses on developing long-shelf life meal kits and other consumer-packaged goods, bought the assets of Chef’d, a higher-end meal-kit delivery service based in California. True Food will pivot Chef’d to brick-and-mortar retail rather than keeping it in the overcrowded online kit space. Many of the online-only, subscription-based meal-kit services have struggled in the past year, revealing that diners want their meals delivered cooked. But putting these same products in grocery stores, where they will be a welcome relief to time-starved consumers who would prefer not to hunt all over the store for ingredients.

Due Diligence More Important than Ever

Acquisitions will become more and more decisive in developed markets like North America and Europe. Foodservice operations in these economies are reaching the limits of organic growth and turning to strategic acquisitions to grow and enhance enterprise value.

As the size of deals continues to increase — and competition for concepts that align with buyers’ existing portfolios and skillsets heats up — it’s more necessary than ever to perform due diligence before any deal is finalized. Not only will a comprehensive commercial and operational due diligence engagement uncover both risks and opportunities for a target company, but it will also ensure that the potential investment aligns with rapidly evolving consumer preferences.

About Aaron Allen & Associates

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims, specializing in brand strategy, turnarounds, commercial due diligence and value enhancement for leading hospitality companies and private equity firms. 

Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.

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