The future is never certain, but it’s safe to say that now’s a good time for restaurant mergers and acquisitions. The recent news that Restaurant Brands International (the parent company of Burger King and Tim Hortons) would be paying top dollar to acquire Popeyes raised some eyebrows. The $1.8 billion transaction — worth more than six times the chicken chain’s 2016 revenue— certainly sounded finger-lickin’ good. At 21x EBITDA, it was the highest transaction multiple ever paid for a U.S. restaurant company. By comparison, when 3G acquired Burger King in 2010, the valuation was at 9x EV/EBITDA.
Of course, not all M&A deals go through so easily. A proposed $1.7 billion deal to sell a majority stake in the Middle Eastern franchise rights-owner of Pizza Hut and KFC collapsed in 2016 after two years of talks. But just weeks after the deal was scrapped, talks resumed when a group of Dubai investors agreed to buy a majority stake in the Middle Eastern operator for about $2.4 billion.
The restaurant industry is notoriously unpredictable but, fortunately, we’ve seen several signs of predictability when it comes to M&A deals. For the most part, transaction multiples have remained stable in recent years – a plus for investors who aren’t too keen on surprises.
Many of the M&A deals from the past year (and, likely, those in the near future) hinge on trends. With urbanization exploding the way it is, chains that have historically been featured in malls will be acquired, with new locations cropping up in untraditional places (as is the case with Wetzel’s Pretzel’s, one major acquisition of 2016). Similarly, cannibalization will force some concepts — like those in the still-growing pizza and burger segments, for example — to merge. Acquisitions will also mean massive expansion for some chains which, like Popeyes, have been limited largely to certain segments of the U.S.
Below, some of the restaurant M&A highlights of 2016, plus what we can expect moving forward.
RESTAURANT DEAL ACTIVITY JUMPED IN 2016
Though the total value of U.S. M&A deals was down 23% in 2016, the number of deals was up, with restaurant M&A deals helping to lead the charge. The U.S. saw 13,142 M&A deals in 2016, with restaurant deals comprising 1.1% (144 deals) of that.
It might not seem like a large percentage, but the number of M&A deals in the U.S. restaurant industry has grown 23% in 2016 — after two consecutive years of negative growth. Meanwhile, the overall number of M&A deals (comprising all industries) grew just 4%.
By and large, transaction multiples (EV/EBITDA and EV/Revenue) have remained stable in the last three years. And with so many under-leveraged brands in the industry, the time is ripe for companies looking to acquire restaurant chains.
In announcing its acquisition of Popeyes, Restaurant Brands International — whose sales skew heavily toward the U.S. — noted the opportunity for global expansion. Global M&A activity set a new record in 2015, with $5 trillion worth of deals worldwide — a more-than one-third increase over 2014 and a record high. The volume of global M&A was down in 2016 (17%, according to some estimates). Still, last year still marked the second-highest year for deal-making since 2007.
RESTAURANT TRANSACTION MULTIPLES HAVE BEEN STABLE IN RECENT YEARS
The valuation ratios for companies involved in M&A transactions in 2016 are below the valuation levels of most companies overall. For the U.S. market (excluding financial companies), EV/EBITDA is about 12.1x. Companies involved in M&A transactions, meanwhile, have an average valuation of 9.7 or 9.8. In other words, investors participating in M&A deals are buying companies “cheaper” than average.
The same goes for the restaurant industry, which sees an overall EV/EBITDA of 12.06x (versus a lower valuation of 9.6x for restaurants involved in M&A transactions). However, deals with higher valuation than the average could be indicative of high growth potential. Tech companies, for instance, are typically valued at higher EBITDA multiples than manufacturing businesses — due to their high growth potential.
Though there are those with exponentially higher valuations, overall, restaurant transaction multiples have been stable in recent years. Stability means predictability, which is of course a good thing in the world of M&A deals. Investors don’t like the unexpected.
Prior to 2014, valuation in the restaurant industry was unpredictable and linked to waves in M&A activity. But from 2014 on, the industry has gained predictability, and valuations have been much more steady — a sign that bodes well for the future.
NOTABLE 2016 RESTAURANT M&A DEALS
One thing nearly all 2016 restaurant M&A deals had in common? The chains that were acquired have a lot of untapped potential, much of it tied to trends like urbanization and expansion. In restaurant markets around the globe, many chains are seeing a downward turn in sales. Still, some of those chains — specifically those that provide something unique — offer a worthy investment. When you add in partners with the know-how to expand in similar markets, it’s a winning equation for growth.
A majority stake in pretzel chain Wetzel’s Pretzels was sold to Dallas private equity firm CenterOak Partners in September 2016, for an undisclosed amount. Though same-store sales have been strong for the chain, change is likely to come — especially considering most Wetzel’s locations are found in traditional malls (which, by all accounts, are dying a slow death). At the time of the acquisition, CEO and co-founder Bill Phelps told a Dallas media outlet that the chain would likely begin opening locations in different venues, like train stations and inside Wal-Mart stores.
In May 2016, German conglomerate JAB Holding acquired Krispy Kreme Doughnuts for $1.35 billion. the European investment fund is home to a fast-growing stable of brands, ranging from Caribou Coffee to Jimmy Choo shoes. With the acquisition (which took Krispy Kreme private), JAB reportedly has ambitions to build a global coffee giant to rival Nestle.
PE firm Roark Capital acquired a majority stake in Jimmy John’s in September 2016. Some have speculated that the move will position the “freaky fast” sandwich chain for a global expansion. Roark, which is also an investor in Corner Bakery and CKE Restaurants, is often credited with helping then-struggling Arby’s shore up both its image and its financials.
MTY Food Group, a Canadian company, acquired Kahala Brands for $300 million in May 2016. Kahala operates a slew of food brands, including Blimpie, Cold Stone Creamery, and Pinkberry. Back in September, MTY entered into a separate agreement, to acquire Baja Fresh Mexican Grill and La Salsa Fresh Mexican Grill.
The cannibalization of the fast-casual pizza segment evident in June, when Pieology Pizzeria acquired its smaller competitor, Project Pie. At the time of the acquisition, Pieology’s CEO said the move would help the chain accelerate its growth, adding that he had long believed “consolidation was the future for the fast-casual pizza segment.”
Bangkok seafood supplier Thai Union Group acquired a minority stake in Red Lobster in October, for $575 million. Thai Union, the world’s largest supplier of canned tuna, took a 25% interest in the seafood chain. The company had been seeking to boost business via acquisitions after a deal to buy rival Bumble Bee Seafoods fell through earlier in the year.
WHAT WE CAN EXPECT
At the end of 2016, a surge in high-profile acquisitions lifted the annual total of global M&A to $3.6 trillion. But it’s uncertain if that trend will continue into 2017.
Technology is expected to be an especially active industry for M&A deals, which could bode well for the restaurant industry overall, which is increasingly turning to advances like automation and self-serve kiosks. And then there are those chains facing poor growth prospects. For them, buying rivals, expanding into new territories (or, in some cases, being acquired themselves) might be the best route forward.
Another advantage for those acquiring restaurant chains, rather than creating new ones, is that they achieve economies of scale and can therefore integrate the supply chain of the current business with the new one. Restaurant mergers and acquisitions also help companies diversify and reduce risk. For instance, a company that only owns a pizza chain will be much riskier than, say, one that owns both a pizza chain and a burger chain.
The nature (and number) of M&A deals hinges on a number of variables, including the policies of President Donald Trump and likely interest rate hikes from the Fed. Confidence in both the corporate and political landscape largely underpins the likelihood of more deal-making. 2017 might be a bit different. Though there’s plenty of political uncertainty throughout the world (thanks to several high-profile elections and the rollout of Brexit), deal activity is expected to remain healthy in 2017. Some have even predicted an M&A “boom” over the year ahead.
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ABOUT AARON ALLEN & ASSOCIATES:
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.