Restaurant Mergers and Acquisitions Reshaping the Foodservice Industry

Restaurant mergers and acquisitions are having some of the most influential impact on the global foodservice industry. Big companies are getting bigger and consolidating chains across categories and cuisines. And regardless of the future economic climate, there will be an opportunity in the foodservice space. If there’s a liquidity crisis, M&A opportunities will come through consolidation and distressed assets investment. If the economy is booming, emerging brands and markets will reveal new growth acquisition targets and look to create footholds in new geographies (38.6% of global M&A activity across all sectors features cross-border transactions already).

While we expect M&A activity to continue to pick up over the next five years, there’s going to be a significant change in strategies. There’s plenty of capital to put behind foodservice companies, and some concepts that are not even on the radar right now will jump to very large valuations in the next few years — and there’s going to be a market for distressed assets as the economy has taken its biggest hit in more than a decade with the impact of the coronavirus crisis.

We’ve seen this in other sectors — technology, in particular — where there’s been a huge uptick in the number of unicorns (privately held startups valued at more than $1b). The restaurant space saw its first unicorn in sweetgreen, and we anticipate a handful more over the coming years. Transformative technologies improving productivity in foodservice are likely to gain attention and investment as well.

When the right components are combined within a platform, the whole can be much greater than the sum of its parts — and this is reflected in valuations.

M&A Activity Trending to Near-Record Highs

Overall M&A activity has been growing at a 9.0% CAGR in the last five years and has topped more than $4 trillion globally, across all sectors. Restaurants account for a small piece of this activity around the world — and it’s in the tens of billions for the U.S. foodservice market. Deals in the food and beverage industry grew at a 9.7% CAGR between 2010 and 2017, while the restaurant portion of that sector enjoyed 6.6% growth over the same period.

Emerging brands are studying incumbents and segment leaders for weaknesses to exploit — and some are, successfully. Those with size and scale are throwing their muscle and might into buying more muscle and might.

There are many explanations for this harried pace of buying, selling, merging, and spinning off.

Some factors impacting the influx of restaurant M&A activity include:

Capital is cheaper than ever, thanks to record-low interest rates
The availability of capital is at a near-record high, thanks to increasing corporate profits
There’s been more money poured into private equity, and a proliferation of PE firms (now more than 8,000 globally, up from 5,000 just ten years ago) leading to increased competition between firms, and some of them seeking new sectors — particularly disruptive forces
Foodservice remains a steady — and relatively easy-to-forecast — growth sector, expanding with inflation, population, and discretionary income
Emerging and frontier economies will see the bulk of future growth, and conglomerates in these markets look to Western brands first to build their empires
While there are plenty of advantages of being a publicly-traded company (most notably, liquidity), it can also lead to greater pressures and short-term distractions with quarter-to-quarter scrutiny

Meanwhile, profit margins are compressing globally, most dramatically in the Middle East, as its foodservice economies move from emerging to developed markets. In response, many scaled chains have adopted a “grow fast or die slow” sensibility. And it’s working — power and dominance are consolidating.

Though restaurants have been gaining a steady share of stomach year-by-year in most geographies (though grocery stores in the U.S. have started to fight back), the battle for the biggest piece of that share is escalating. In mature markets, the slugfest is brutal and unapologetic. While industry growth is stable and steady, some sub-sectors and categories may be characterized by a sometimes-gruesome competitiveness. In some environments, it’s more dangerous to stand still than to take calculated risks.

Acquisitions make strategic sense in this era of cheap capital, fierce competition, and slow growth, but only if these moves are backed by solid due diligence and a forward-looking strategy.

Benefits of Restaurant Mergers & Acquisitions

For mature brands, there’s expansion and consolidation. In the U.S., this is the case of many casual dining restaurants — 33% of 2018 deals involved targets in the full-service category. In other cases, deals are often more focused on growth companies. This strategy has been successful for the fast-casual sector in the past, and is increasingly starting to benefit the companies that have a “future of foodservice” angle to them — whether that’s technology, innovation and optimization in the front and back of the house, improved unit-economic model, or delivery companies (which have received a tremendous amount of capital investment over the last few years).

There are a variety of factors that influence mergers and acquisitions decisions, whether focused on mainly strategic or financial motivations. While these drivers for M&A are not necessarily new, understanding the evolving landscape helps to identify non-traditional value creation opportunities and a better assessment of risk.

Consolidation in sectors enables companies to gain market share which can then help from a management point of view and optimizing overhead. In other cases, investors put more of a focus on reducing costs. Next, we present some of the benefits motivating restaurant M&A.

1. Dramatic Top-Line Growth When Organic Growth Is Hard to Come By

When organic growth may be hard to come by, acquisitions can keep overall company revenue lines climbing steep slopes. An existing concept comes to its new owner with all its tangible and intangible value — from units and equipment to menus and brand — as well as its customer base with it. Combined, these new additions to the original portfolio accelerate revenue growth.

In 2018, revenue growth among publicly traded foodservice companies in the U.S. amounted to $8.1b (+7% year-over-year growth, from $122.1b to $130.3b). Inorganic growth (from acquisitions) was responsible for 28% of the increase. In the increasingly saturated U.S. market, inorganic growth will continue to have significant impacts for both private and public companies.

2. Expand Market Share While Acquiring the Competition

Consolidation is a major theme across foodservice, from the declining casual-dining segment to the booming delivery sector, and we expect this trend to accelerate. This strategy is especially useful for mid-sized firms hoping to increase their market share.

Example: In April 2018, rumors of a merger between DoorDash and Postmates began swirling. As of February 2018, Postmates controlled 9.1% of the U.S. delivery market while DoorDash claimed 13.9%. Their combined 21% would push them ahead of Uber Eats, which controlled 19.9%, and solidify their lead on Amazon (4.0% market share).

HelloFresh successfully completed a similar strategic acquisition when it bought Green Chef in March 2018. The purchase helped HelloFresh pass Blue Apron and become the largest meal-kit company in the U.S.

3. Enter Fertile New Fast-Growing Markets

Acquisitions can be a means to penetrate foreign markets or new segments or categories “without doing the work” and spending time setting up a supply chain, establishing a location strategy, testing the new concept, etc.

Example: Amazon purchased the Middle Eastern e-commerce firm Souq in July 2017, giving the U.S.-based firm access to 45 million users in a region where online purchasing is growing at record speeds. E-commerce doubled between 2015 and 2017, and it is projected to post growth rates above 20% through 2021.

Amazon’s acquisition strategy also helps it gain a foothold in segments it has struggled to penetrate. Recognizing the growth of home delivery for groceries — 70% of shoppers are projected to buy at least some of their food online by 2025 — Amazon launched Amazon Fresh in March 2017. By November of that year, it had discontinued service in nine states, with some employees privately blaming the U.S. Postal Service. The acquisition of Whole Foods is giving Amazon another shot: with brick-and-mortar stores to serve as hubs and independent contractors working as drivers through the Amazon Flex program, the company is set up to claim a significant share of this new market.

4. Diversification

Adding brands to a portfolio can bring new kinds of guests into a system’s orbit.

Example: Coca-Cola has been buying up and developing new beverage lines for almost two decades. From Odwalla (2001) to Honest Tea (2008) and Costa Coffee (2018), the undisputed soda-champion is trying to reach more health-conscious customers.

These purchases, alongside the in-house development of brands like Dasani, give Coca-Cola an opportunity to sell to every consumer.

When Marriott International bought its former rival Starwood Hotels & Resorts in 2016, it acquired all Starwood properties — physical and intellectual. In the fourth quarter of 2016, Marriott reported a $42m increase in profit and a 47% revenue improvement. In addition to the revenue and profit benefits Marriott reaped with the Starwood acquisition, it also got its 21-million-member-strong SPG loyalty program.

5. Getting Innovative Products or Companies

Foodservice is still undergoing seismic shifts and the pace of change is expected to continue — if not accelerate — in the coming years, sparked not only by even more transformative technological developments but also by the arrival of Gen Z, set to become the largest demographic group in the U.S. in 2019. Acquisitions can help companies keep pace with the evolving industry, and Starbucks’ handling of its Teavana acquisition is a key case study in this strategy.

Example: Since purchasing the tea company in 2012, Starbucks has integrated its products into its own units, building Teavana into a $1b brand. Where the parent company failed was in developing and nurturing standalone units: the real-estate strategy focused primarily on malls, which continue to suffer from declining traffic. In July 2018, Starbucks announced that it would close all 379 Teavana locations. Some were quick to classify this as another example of Starbucks’ spotty acquisition history, which includes Evolution Fresh juices and the La Boulange bakery.

But the company’s pivot from retail locations to grocery-store sales shows a canny understanding of market trends (and its solid understanding of corporate M&A strategies). Not only does the move rescue the brand from the graveyard of shopping malls, but it also gives Starbucks a new line of retail revenue, especially key after selling the rights to coffee sales in groceries to Nestle in May 2018.

6. Integrate Value-Enhancing Technologies

As recently as 2009, some restaurant operations still saw their online presence as optional. At the NRA conference that year, Sally Smith of Buffalo Wild Wings said her organization would take a wait-and-see approach to social media. Such an attitude today feels incredibly outdated: the question isn’t whether to integrate technology, but how to do it. Acquisitions are a surefire way to add technology to an operation.

Example: In May 2018, Landcadia, the holding company that owns Landry’s Seafood, Morton’s The Steakhouse, and almost forty other restaurant and hotel brands, acquired Waitr, a delivery platform centered in underserved markets in the American Southeast. The deal will not only give the Landcadia restaurant group a dedicated delivery platform — freeing the company from having to create its own — but it also allows them to enter the booming delivery market, where enterprise value is growing at an incredible pace.

Yum! Brands’ February 2018 $200m (3%) stake in Grubhub follows a similar logic: the investment will make Yum!’s brands more accessible to consumers, but it will also give the QSR operation a share of the delivery platform’s stunning valuation.

7. Push New Products to Market

For multi-brand portfolios that want to add new concepts, acquisitions skip the development and proof of concept phase and go right to expansion.

Example: This strategy seems to motivate the massive MTY Food Group, which now controls over 70 brand names. In November 2017, it added two burger concepts, The Counter and Built Custom Burgers, to further expand its portfolio.

Other players in the food and beverage space are making similar moves. In May 2018, Kroger supermarkets spent $700m on Home Chef, a Chicago-based meal-kit company that already delivers 3 million meals to people’s homes every month. Home Chef will continue its original business while making its products available in Kroger grocery stores, allowing the chain to access the growing meal-kit sector, which is expected to have $10b in revenue in 2020.

8. Claim Brand Value and Intellectual Property

By 2015, intangible assets, which include intellectual property and goodwill, accounted for a staggering 84% of the S&P 500’s value. This shows a 394% increase in 40 years. Globally, the most profitable businesses are those in the idea and knowledge economies, and value increasingly comes from brands and trademarks. Acquiring restaurant operations out of bankruptcy can revive still-valuable IP, adding its value the purchaser’s portfolio.

Example: In 2017, Landry’s won an auction for Joe’s Crab Shack and Brick House Tavern, spending just $57m for the two brands. With 95 locations open at the time, each unit cost Landry’s approximately $600k, a steal considering the concepts’ reported $3.1m AUV in 2013.

IP-focused acquisitions are also heating up the delivery space. In January 2018 Uber Eats bought New York-based start-up Ando; a company spokesperson explained that “Ando’s insights will help [Uber’s] restaurant technology team as we work with our restaurant partners to grow their business.” As delivery companies continue to consolidate, we’ll see more large platforms buying smaller competitors for access not only to their proprietary tech but also to the data they’ve collected on consumer behavior.

9. Complete Product-Line Puzzles

Large firms may make small acquisitions to consolidate market share, buy out competitors, or enter new markets. Many of the deals mentioned here qualify as bolt-on acquisitions, in which a smaller operation is integrated in a larger organization’s supply chain and distribution network. That’s the strategy General Mills is following as it adds brands like Annie’s Organic Foods, Larabar, and, most recently, Blue Buffalo Pet Products. The deals let General Mills enter the organic and healthful market and give the acquisitions access to many more retail outlets.

For this reason, lower middle-market leaders often look for a larger company to acquire them. As operations transition from emerging to emerged brands, they often find their capabilities — in human resources, marketing, supply chain, and governance — stretched their breaking point. They’ve gotten too big to keep staffing levels low and lean, but they’re still too small to completely fill out the corporate structure. Being bought out by a larger organization, with greater managerial capabilities, might be the safest way to grow.

Example: In the world of foodservice acquisitions, few firms have been as active — or as focused — as JAB. Since 2012, the German holding company has been building a coffee-and-bakery empire. Starting with Peet’s Coffee and Tea in 2012, JAB has bought up Keurig Green Mountain (2015), Krispy Kreme Doughnuts (2016), Panera Bread (2017), and most recently Pret a Manger (2018). Besides gaining market share in the café-bakery segment, JAB is also pushing competitors to make big moves of their own, as Nestle’s massive, $7b distribution deal with Starbucks demonstrates.

The deal between Krispy Kreme and Insomnia Cookies, announced in July 2018, is a perfect example. With 1,400 locations globally, Krispy Kreme is more than ten times the size of Insomnia, which has just 135. Both organizations contribute unique capabilities to the deal: besides its standalone locations, Krispy Kreme sells its frankly perfect donuts in grocery and convenience stores, and Insomnia specializes in late-night delivery. More than that, Krispy Kreme, which has been in the business for more than 80 years, can help Insomnia move seamlessly out of the lower middle market as they transform from a start-up to a mature brand.

10. Earnings From Buying Low, Selling Dear

This isn’t the easiest way to make money, of course: turning around a struggling restaurant concept, especially one in the casual-dining sector, is a task only the bravest in the industry are willing to take on. But the potential rewards match the challenge, with a successful turnaround creating ten- to twenty-fold returns on investment.

In March 2018, Spice Private Equity acquired Bravo Brio Restaurant Group for $100m. The last registered valuation for the company was 2.8x (EV/EBITDA) as of December 2017 — well below the industry median of 10.6x. These fire-sale prices offer the new owners an incredible opportunity to build value over the holding period. If Spice can bring Bravo Brio’s valuation up to just the industry median, without making any EBITDA improvements, it would result in a more-than-doubled enterprise value.

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

Restaurant Divestitures

The history of Yum! Brands isn’t a story of strategic acquisitions; it’s actually a case study in smart, perfectly timed divestitures and spinoffs. Yum! Brands started as Pepsico’s fast-food division, which was spun off as Tricorn in 1997. At the time, the three brands under the Yum! Umbrella – KFC, Pizza Hut, and Taco Bell – had $20.5b in annual sales, a figure that has since more than doubled. Since the spin-off, Yum! Brands’ stock price has increased by 1,500%, while Pepsico’s has had a much more modest 221% increase.

Restaurant M&A Deals by Year

Restaurant M&A activity has been white-hot in 2017-2019. However, the rise of investments in the foodservice industry had started long before. The number of restaurant M&A deals in the U.S. increased by 86% between 2004 and 2016.

In 2017, restaurant M&A continued at a high pace and included all manner of deals, and in nearly every segment. Among the most notable deals, 44% of targets are in the Fast Casual or Casual Dining segments, pointing to evidence of consolidation.
Valuations for M&A restaurant deals were close to historical averages (over the previous ten years). In terms of EV/EBITDA, there was an 8% increase in the multiple compared to 2016 (some large deals with hefty valuations took place this year, such as the acquisitions of Panera Bread and Popeyes). In terms of EV/Revenue, transactions were at a multiple of 1.0, equivalent to the historical average and 11% higher than 2016.

In 2018, there were 124 restaurant deals in the U.S. (Jan-Oct, versus 117 over the same period in 2017), and the increased trend is expected to continue. Restaurant valuations reached EV/EBITDA levels of 11.1x (up from an average of 10.8x in 2017) and EV/Revenue of 1.4x (up from 1.0x of 2017).

High Profile Deals in 2018

In the U.S., the largest foodservice deals in 2018 included:

Nestle (based in Switzerland) buying the rights to market Starbucks retail products from beans and capsules for $7.2b
$2.3b acquisition of Sonic by Inspire Brands (Roark)
Pret A Manger (based in the UK, but operates in the U.S. as well) being acquired for $2b by JAB Holdings. Through its subsidiary Krispy Kreme, JAB also 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.
$770m acquisition of Bojangles’ by Durational Capital Management
Kroger acquired Home Chef (meal kit company) for $700m and plans to offer its meal kits in its vast empire of supermarkets
Fogo de Chão (which made an IPO in 2015) was taken private by Rhone Capital for $560m. Though the Brazilian steakhouse has strong average unit volumes, high average checks, and good profit margins, it had failed to build stock prices since its IPO in 2015.
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.
Elite Restaurant Group will expand its concepts with corporate-owned locations. In April of 2018, 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.
Sinelli Concepts, based 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.
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.
Del Frisco’s picked up the more stable Barteca Restaurant Group. Del Frisco’s purchase of Barteca gives it Bartaco, a more casual concept that will complement its higher-priced eateries without sacrificing service or quality. These initiatives highlight casual dining’s unique place in the restaurant landscape rather than trying to imitate the success of faster and cheaper options.
Almost exactly a month after High Bluff Capital Partners announced its purchase of Quiznos’ parent company QCE LLC, it acquired Taco Del Mar: more evidence that the middle market is steaming. While Quiznos has been struggling for years, and High Bluff hopes to stage a turnaround, the investment in Taco Del Mar is designed to fuel the fast-casual chain’s expansion efforts.
Landcadia, which owns and operates Landry’s Seafood, Bubba Gump Shrimp, Morton’s The Steakhouse, and over three dozen more restaurant and hotel brands, purchased Waitr, a delivery platform that services more than 5,000 restaurants in markets all over the Southeast.
Golden Tree, the parent company of quick-service restaurant (QSR) fried-chicken chain Golden Chick, purchased Texas-based Fireside Pies
Fresh Hospitality scooped up Taco Mac.
Undisclosed buyers who took Huddle House off Sentinel Capital Partners’ hands
Spice Private Equity purchased Bravo Brio Restaurant Group. Bravo Brio, which owns Bravo! Cucina Italiana, Bon Vie Bistro, Brio Tuscan Grille, and Brio Coastal Bar & Kitchen, has suffered the fate of many casual-dining restaurants: declining sales and dwindling locations.
TriSpan Rising Stars, a foodservice-centric firm, acquired Rosa Mexicano.
UberEats purchased Ando, the delivery-only concept from celebrity chef David Chang. Chang hoped to find solutions to all the various challenges food faces between the kitchen and the customer’s front door but got bogged down in the incredibly complex logistics and technical requirements. It often used Uber Eats to deliver its food, only hiring its own delivery staff for core clientele. Ando ceased operations the day after the deal was announced.
Square, Caviar’s parent company, bought certain assets of Dallas-Fort Worth–based Entrees On-Trays. The acquisition is a nice match, as both Caviar and Entrees On-Trays specialize in delivering meals from local restaurants.
HelloFresh bought up meal-kit competitor Green Chef, which specializes in organic ingredients, vegan and gluten-free options, and meals that fit in with Paleo and Keto diets. This nicely expands HelloFresh’s offerings.
SJB Brands purchased Jamba Juice–competitor Juice It Up!, which has recently expanded its beverage offerings to include cold-pressed organic and raw juices.
Grabbagreen, a QSR concept that replaced supersized value meals with superfood bowls and wraps, was purchased by Canadian franchisor MTY Food Group, which also owns Blimpie, Cold Stone Creamery, and Pinkberry.
Butterfly, a private equity firm specializing in foodservice, bought Modern Market, which has locations in Arizona, Colorado, Maryland, Texas, and Washington, DC. Modern Market makes farm-to-table accessible to more people by offering sustainable ingredients in a quick-service environment.

High Profile Deals in 2017

BOB EVANS FARMS ACQUIRED IN $1.5 BILLION DEAL

Perhaps the biggest 2017 restaurant merger or acquisition deal (at least so far) was the September announcement that Post Holding Inc. (maker of Honey Bunches of Oats and Grape-Nuts cereals), would buy Bob Evans Farms for roughly $1.5 billion. After activist investor Thomas Sandell began pushing for change, Bob Evans announced it would split the company in 2017, when it sold its 522 Bob Evans restaurants to private-equity firm Golden Gate Capital in a $565 million deal in May. The chain was then taken private as Bob Evans Restaurants.

ROUND TABLE PIZZA ACQUIRED BY GLOBAL FRANCHISE GROUP

Global Franchise Group, the parent company of Great American Cookies, acquired the 450-unit Round Table Pizza chain for an undisclosed amount in September 2017. The acquisition of the pizza company gives the Atlanta-based Global Franchise Group a portfolio of brands in operation of more than 1,500 locations and nearly $1 billion in combined system sales. GFG also owns Pretzelmaker, Hot Dog on a Stick and Marble Slab Creamery/Maggie Moo’s Ice Cream.

JAB ACQUIRES PANERA

While rumors swirled that that Panera might be acquired by one of its peers in the restaurant industry (like Domino’s, Restaurant Brands International, or Starbucks), the bakery and cafe chain eventually found a new parent in JAB in a $7.5 billion deal completed in July 2017. JAB, a German-based conglomerate, has also acquired Krispy Kreme, Keurig, and Peet’s Coffee & Tea.

POPEYE’S SNATCHED UP IN $1.8B DEAL

Restaurant Brands International made headlines in 2017, when it announced it would acquire Popeyes Louisiana Kitchen for $1.8 billion in cash. The company is expected to use its international reach to bring Popeyes’ to new geographies around the globe. Restaurant Brands was formed in 2014, through an $11 billion merger between Burger King and Canadian chain Tim Hortons).

STARBUCKS BUYS EAST CHINA BUSINESS

In July, Starbucks announced it had entered into a definitive agreement to acquire the remaining 50% share of its East China business from long-term joint venture partners, Uni-President Enterprises Corporation and President Chain Store Corporation, a deal valued at approximately $1.3 billion in cash consideration (and the largest single acquisition in the company’s history). The acquisitions builds on the company’s ongoing investments in China, its fastest-growing market outside of the United States in terms of store count.

NESTLÉ ACQUIRES A MAJORITY STAKE IN BLUE BOTTLE

Nestlé bought into the third-wave coffee buzz with its September acquisition of a 68% stake in Blue Bottle Coffee, an Oakland-California-based purveyor of high-end coffee. According to a press release, Blue Bottle Coffee will continue to operate as a stand-alone entity. Other terms of the deal were not disclosed. Currently, Blue Bottle has about 40 cafés in New York, San Francisco and other metropolitan cities, with that number expected to reach 55 by year’s end. The acquisition will make Blue Bottle the latest coffee chain in Nestlé’s cadre of brands, which also includes Nescafe and Nespresso. Nestlé’s been snapping up other food brands, too — earlier this year it purchased vegetarian packaged foods company Sweet Earth, and also invested in meal kit company Freshly.

DARDEN BUYS CHEDDAR’S

In March 2017, Darden Restaurants agreed to a buy Cheddar’s Scratch Kitchen for $780 million from a group of stockholders including private equity firms L Catterton and Oak Investment Partners. Cheddar’s currently has 165 locations, including 140 owned and 25 franchised, in 28 states, though Darden has noted the chain has “significant growth opportunities in new and existing markets” and average annual restaurant volumes of $4.4 million.

DON THOMPSON-BACKED FUND INVESTS IN FAST-CASUAL PIZZA

In May, Chicago accelerator Cleveland Avenue LLC (founded by former McDonald’s CEO Don Thompson) acquired a majority stake in the fast-casual pizza chain PizzaRev. The fast-casual pizza chain grew quickly after a 2003 investment by Buffalo Wild Wings. PizzaRev and currently has more than 50 locations, with 200 more under development.

OAK HILL CAPITAL ACQUIRES CHECKER’S

In March 2017, private equity firm Oak Hill Capital Partners announced plans to buy the Tampa-based Checker’s fast-food chain from its equity ownership for roughly $525 million.

J. ALEXANDER’S MERGES WITH NINETY NINE RESTAURANT

Fidelity National Financial Ventures, the parent of Ninety Nine Restaurant & Pub, a 106-restaurant chain, announced in August that it would merge with J. Alexander’s Holdings in a $199 million deal. J. Alexander’s operates four concepts including 19 eponymous locations, as well as Redlands Grill and Stony River, each with 12 units. The 65-year-old Ninety Nine, a casual dining chain, reportedly had more than $300 million in revenue in 2016.

FATBURGER MAKES MOVE INTO STEAKHOUSES

In September, Fatburger parent FAT Brands, which recently announced plans to go public, paid $10.5 million to acquire Homestyle Dining, owner of the Ponderosa and Bonanza steakhouse chains. The acquisition includes ambitious plans for international franchising, as well as the development of a fast-casual version of Ponderosa.

RITA’S ACQUIRED BY PE FIRMS

In January, Argosy Private Equity and MTN Capital Partners took a controlling stake in Italian ice chain Rita’s, which has more than 600 units in the US, and is working to expand internationally in the Philippines, Canada and the Middle East. Terms of the deal were not disclosed.

CARIBOU SNATCHES UP BRUEGGER’S

Caribou Coffee announced plans to acquire Bruegger’s Bagels in August. Caribou’s parent, JAB Holding Co., is the owner of a growing portfolio of restaurant brands including Panera Bread, Krispy Kreme Doughnuts and Einstein Bagels. The 269-unit Bruegger’s was acquired for an undisclosed amount.

SBE MERGES WITH HAKKASAN

SBE, a privately held hospitality company that operates hotels, restaurants and nightclubs around the world, announced in March that it was in “advanced discussions to merge Hakkasan Group into the SBE family.” Founded in 2002, SBE manages 23 hotels and residences in nine markets and many more entertainment and food and beverage outlets, including Bazaar Meat, Cleo, Umami Burger and Katsuya restaurants at SLS Las Vegas; Double Barrel Roadhouse at Monte Carlo; and Hyde nightclub and lounge at Bellagio and T-Mobile Arena.

CURRY UP NOW ACQUIRES TAVA KITCHEN

In a deal meant to propel expansion, San Francisco fast-casual restaurant Tava Kitchen was acquired by Curry Up Now, another Bay-area Indian concept, in May. Terms of the deal were not disclosed.

MOOYAH BURGERS SOLD TO PE PARTNERS

Reach Restaurant Group sold Mooyah Burgers, Fries & Shakes to a partnership led by Balmoral Funds LLC and Gala Capital Partners LLC in an April 2017 deal. The move means that the better burger chain will be primed for further growth, having entered several new states in 2016.

CHALAK MITRA SELLS THREE BRANDS

In May, The Chalak Mitra Group (parent to the Genghis Grill chain) announced the sale of three of its non-core brands: Elephant Bar Restaurant, Baker Bros. American Deli, and Ruby Tequila’s Mexican Kitchen. The 10-unit Elephant Bar was reportedly sold via stock purchase agreement to an affiliate of SBR LLC, a Connecticut investment company.

STAR BUFFET ACQUIRES THE RANCHER’S GRILL

Star Buffet announced it had acquired The Rancher’s Grill steakhouse in Deming, New Mexico for an undisclosed amount in March, with the move expected to integrate the new restaurant into the company’s StarTexas Restaurants, Inc. subsidiary.

PE FIRM BUYS MAJORITY STAKE IN FIRST WATCH

In July, PE firm Advent International announced its purchase of a majority stake in breakfast-and-lunch chain First Watch from Freeman Spogli & Co. In a statement released at the time, the firm’s managing director said the investment was an obvious one, as First Watch “is strongly aligned with trends toward healthier eating and better ingredients, and positioned to not only grow within existing markets but also to expand the unique concept to guests in new geographies.”

ROARK BUYS REGIONAL BARBECUE CHAIN

Roark Capital, parent to Carl’s Jr., Jimmy John’s, Arby’s and a slew of other restaurant chains, added the Jim ‘N Nick’s Bar-B-Q chain to its holdings in July. The price paid for a controlling interest in the 37-unit regional barbecue chain was not disclosed.

FOUR FOODS GROUP ACQUIRES BURGER CHAIN

In July, six-unit Hawaiian chain Mo’Bettahs was acquired by Four Foods Group, parent to the Kneaders Bakery & Café chain, and a portfolio of brands including three units of R&R Barbecue, two locations of The Soda Shop, and 48 Little Caesars restaurants in Alabama and Louisiana.

CEREBRUS CAPITAL BRINGS GARDEN FRESH BACK FROM THE BRINK

After two potential buyers backed out of deals that would have seen them acquire the bankrupt Garden Fresh, the owner of Souplantaion and Sweet Tomatoes, Cerberus Capital Management swooped in. Terms of the January deal were not disclosed.

TOM + CHEE ACQUIRED BY GOLD STAR CHILI

Tom + Chee, a Cincinnati-based grilled cheese restaurant chain, was acquired by Gold Star Chili, which bought the assets from its lender, and finalized the deal on September 20.

UNCLE JULIO'S ACQUIRED BY L CATTERTON

L Catterton, a consumer-focused private equity firm, announced in September that it had acquired Uncle Julio’s, a polished casual Mexican restaurant. Terms of the transaction were not disclosed.

RUBY TUESDAY SOLD TO NRD CAPITAL

Ruby Tuesday was sold for $2.40 a share, or $146 million, to a fund managed by private equity firm NRD Capital, the company announced in October. The deal includes the acquisition of all of the restaurant chain’s stock in cash.

ROARK CAPITAL MERGES ARBY'S AND BUFFALO WILD WINGS

Roark Capital made headlines in November when it announced a merger of Arby’s Restaurant Group and Buffalo Wild Wings. And the PE firm isn’t slowing down, with reports suggesting Roark is anxious to acquire other brands along the same lines of the chicken wing and sandwich chains, merging them all under one name — Inspiring Restaurant Brands — and eventually going public.

FAT BRANDS ACQUIRES HURRICANE GRILL & WINGS

FAT (Fresh. Authentic. Tasty.) Brands Inc. (NASDAQ:FAT) announced in November that it had signed a definitive agreement to acquire Hurricane Grill & Wings for $12.5 million. The acquisition will be funded with cash on hand and third party financing, and was expected to close in 2017.

TPG GROWTH ACQUIRES MAJORITY STAKE IN MENDOCINO FARMS

TPG Growth acquired a majority stake in Mendocino Farms, a California sandwich chain. The PE firm said it planned to use the acquisition to expand the concept outside the state.

PANERA BREAD ACQUIRES AU BON PAIN

One of the biggest restaurant M&A deals of 2017 was the announcement that Panera Bread was buying the Boston-based bakery-cafe chain Au Bon Pain for an undisclosed amount (announced in November). Panera was acquired earlier this year by the privately held investment firm JAB for $7.5 billion. The acquisition is part of Panera’s plan to expand its footprint beyond the traditional storefronts and into hospitals, universities, transportation centers, and urban locations.

TAZO TEA ACQUIRED BY UNILEVER

TAZO — the tea company owned by Starbucks — would be acquired by Unilever. Under the asset purchase agreement, Unilever will acquire the TAZO® brand and all related intellectual property, signature recipes and inventory for US$384 million.

YO! SUSHI BUYS BENTO SUSHI

UK-based chain Yo! Sushi announced it would buy Canada’s Bento Sushi in a $78.2 million deal in November. The combined business will make the company one of the largest sushi companies outside of Japan.

SODEXO ACQUIRES CENTERPLATE

Sodexo announced it had signed an agreement to acquire Centerplate, a food and beverage, merchandise and hospitality services provider at sports facilities, convention centers and entertainment facilities throughout the US, the UK, Canada and Spain. The deal was worth a reported $675 million and was expected to close by the end of 2017.

BEEKMAN INVESTMENT MAKES MAJORITY INVESTMENT IN ANOTHER BROKEN EGG

New York PE firm Beekman Investment Partners made a majority investment in breakfast concept Another Broken Egg in November. At the time of the announcement, the firm said it hoped to “build on the company’s legacy and accelerate growth.”

BRENTWOOD ASSOCIATES BUYS STAKE IN UPWARD PROJECTS

Brentwood Associates announced it had taken a significant stake in multi-concept company Upward Projects, which operates five brands (Windsor, Churn, Federal PIzza, Positano WineCafé and Joyride Taco House) and 12 restaurants in Arizona and Colorado. Terms of the deal were not disclosed, but the California PE firm already has a broad restaurant portfolio, with investments in Veggie Grill and Blaze Pizza, among others.

MTY FOOD GROUP ACQUIRES COUNTER BURGER

MTY Food Group Inc., owner of Kahala Brands, agreed to acquire the parent of The Counter and Built Custom Burgers brands, it announced in December. Terms of MTY’s planned acquisition of the California-based company were not disclosed.

VALOR EQUITY MAKES INVESTMENT IN LETTUCE ENTERTAIN YOU

Valor Equity Partners made a majority investment in Lettuce Entertain You Enterprises Inc.’s quick-service Wow Bao concept. The funding is expected to allow Wow Bao to open a delivery-only platform in Los Angeles and expand its brick and mortar presence.

RESTAURANT TECH INVESTMENTS IN 2017

In January, Palo Alto-based Symphony Technology Group announced it had acquired Fishbowl Inc., a customer engagement platform provider for the restaurant industry. Fishbowl helps restaurants optimize their marketing, strategy, and revenue management through advanced guest analytics software. Yelp acquired restaurant reservation app Nowait for $40 million in an all-cash deal in March. The deal worked to transition Nowait’s waitlist system and seating tool to Yelp, where it’s been integrated in the Yelp app and mobile food-ordering system, Yelp Eat24.

In August, Grubhub acquired Eat24 from Yelp for $287.5 million in cash. (Yelp paid less than half that price, $134 million in cash and stock, to acquire Eat24 in February 2015.) Yum China Holdings (the operator of KFC and Pizza Hut restaurant chains across the country) bought a controlling stake in Chinese food delivery service provider Daojia in May. No figures were released, though Reuters reported in November thatYum China was in talk to buy the company for roughly $200 million.

OTHER INVESTMENTS AND FUNDING FOR RESTAURANTS IN 2017

Public to Private Transactions

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.

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.

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 M&A Trends

There are a handful of themes prevalent in the restaurant M&A space, including:

Deals are Becoming Increasingly Strategic

Restaurant mergers and acquisitions deals are gravitating more towards the strategic (rather than the financial): the share of strategic deals increased 16% between 2004 and 2016. That suggests that a level of understanding (one supported by a specialist with knowledge of the external and internal factors affecting restaurants today and tomorrow) will be much-needed for deals in the future. We’ll likely see even more restaurant M&A deals in the future, thanks to more funding flowing into the space.

Funds Pouring in High-Growth Categories, Consolidation of Saturated Segments

More investment is being placed into high-growth concepts — those in categories like snacking and coffee, rather than in slumping segments like casual dining. Outdated concepts in saturated sectors will struggle to find buyers, while on-trend concepts will likely prove to be the most worthy investments.

Investments in Ghost Kitchens

Restaurants with no physical locations have been cropping up around the country, largely in response to the success of delivery platforms like UberEATS and GrubHub. For restaurant concepts, the move is a win-win. A recent report by Fast Company found that many fast-casual restaurants dedicate 75% of their stores to seating, while some 90% of their customers take their meals to-go. A “ghost” storefront — in which customers can order their meals to have it delivered, but never actually go in the restaurant — certainly solves that problem. It also remedies high rent costs, as delivery-only units don’t necessarily have to be located in busy, walkable (i.e. high rent) locations.

Digital M&A

This could entail a company investing in analytics and software to improve the way they make and sell their products or it could involve a company buying sensors or Internet of Things applications to add to their products (adding sensors to produce, for interest, so buyers can know when it was picked and what farm it came from).

Mergers and Acquisitions of Foodservice Technology Increasing

While other sectors have historically seen significant increases in productivity, improvements in the foodservice industry have been minimal over the last 30 years. The Second Industrial Revolution benefited the industry (overall) with improvements in agricultural production. The Third Industrial Revolution, where consumer and electronics products led growth, had a very slight impact on foodservice, with the adoption of the point of sale system — most of which are really a glorified cash register.

But the sector is now in a prime position to make modernization efforts with the impacts of the Fourth Industrial Revolution and — in doing so — is becoming a more attractive target for investment.

Cross-Border M&A Gaining Traction

Jollibee, for instance, finalized its acquisition of Denver-based Smashburger in 2018. The company initially tried to expand to other markets and they met unforeseen challenges and struggled because customers outside of the Philippines were unfamiliar with the brand. But Jollibee does know QSR operations well, so they looked for an opportunity in the U.S. with a large enough footprint to gain scale.

Larger foodservice groups have been using cross-border transactions to grow for a while now. Growth in the U.S. for large established companies is at a point of saturation — any new units for one brand are coming at the expense of someone else. So inorganic growth and foreign expansion are the greatest opportunities.

We anticipate more foreign buyers coming to the U.S., and U.S.-based investors making further investments globally. This strategy is a way to gain immediate access to a footprint, infrastructure, talent and human resources, and a regionalized know-how.

Frequently Asked Questions

1. What are some of the common mistakes made in restaurant M&A transactions?

The M&A process can be a long one. Underestimating the amount of time, effort, and resources need to be allocated for a successful transaction is one mistake we’ve seen often. For restaurant M&A in particular, because it’s such a specific niche, not having specialized advisors is another common mistake — made by both the buy-side and the sell-side.

2. What have been the biggest and most successful restaurant mergers or acquisitions?

While many private transactions are undisclosed in terms of value, there have been plenty of significant restaurant M&A deals over the years (some of the largest of the last two decades are summarized here). Burger King acquired Tim Hortons, now both operating under parent company Restaurant Brands International, for $11.4b in 2014, one of the largest transactions to date. JAB Holdings, the owner of Panera Bread, Au Bon Pain, Breugger’s, and others, has been one of the most active companies in the restaurant acquisition space over the last few years, especially.

3. How do I prepare for a successful restaurant transaction?

This is a great question — and just asking it is the first step to make sure you’re set up for success. We always say “the better the question, the better the answer”, so ensuring that you’re asking the right (and tough) questions ahead of entertaining a transaction is the right place to start. We’ve assembled a guide on how to prepare for private equity investment as well, which outlines some highlights of the process. Some highlights: get clarity on what you really want (and define what are your “deal breakers” early on), look for investors or partners with similar values and goals as you (think about a transaction almost like a marriage), and determine what you believe is a fair purchase price prior to negotiations.

4. What is a fair value for a restaurant business?

As mentioned above, there are a myriad of ways to value your business. Having an external audit and assessment of your business can be very helpful in negotiations, as having a third-party weigh in lends credibility to the valuation metrics. Identifying comps and factoring in the pipeline of potential at a fair market value help to inform a selling price.

5. How can mergers or acquisitions go wrong? What could stop the process?

Plenty of reasons. Not having the right partner. Not working with the right advisors. Economic challenges (whether foreseen or not, like the coronavirus pandemic — which effectively pushed a global pause button on all M&A transactions). There’s plenty within a deal that can go sideways, but having the right advisors in your corner helps to ensure a smooth transition and post-merger integration period so that all shareholders and stakeholders involved feel good about the process and everyone wins (as this is what should be the ultimate goal of a successful transaction).

Grow Fast or Die Slow

M&A activity, especially in the foodservice space, is on an unprecedented run. Forward-looking executives are using mergers and acquisitions to fortify their operations: achieving top-line growth, consolidating market share, and adding necessary technological capabilities. The deals being made today will have a profound impact on the future of these organizations.

As interest rates rise and margins shrink, growth will become harder and harder to achieve in saturated categories and markets. Even frontier economies are quickly moving from fragmented to chain-dominated, and restaurants will have to do even more to stand out from their competitors and strengthen their systems with growth in size and scale.

This period of inexpensive capital and global opportunity is coming to an end, and leadership teams face a stark choice: execute a robust and aggressive acquisition plan to grow quickly or try to survive the squeeze against larger and/or more agile competitors that used this moment to lay the groundwork for a secure future.

M&A Terminology

Merger: A common term for when two organizations join and become a new business, usually with a new name. Effective mergers can help expand a company’s reach and grow market share.
Acquisition: When one business buys another (generally smaller) company, which is then absorbed into the parent organization or run as a subsidiary. Acquisitions help companies by providing them with new capabilities and access to specialized experts in a reduced time than it would take to develop these resources from the ground up.
Buy-Side: The overarching phrase for the entity that is interested in securing/purchasing assets with the intention of managing and growing a portfolio through direct investments.
Sell-Side: Blanket term for entities that are focused on creating and selling stocks, bonds, or other interests to make available to the buy-side investors.
Divestiture: A method or companies to manage their assets through eliminating a part of a business, most commonly through a sale, exchange, or bankruptcy. Divestitures most often occur if one area of a business is redundant (which can be the case after a merger or acquisition) or when a sale can help to streamline operations or maximize value for a company.
Public to Private: A transaction that takes place when a private company makes a bid for a publicly listed entity. In these types of deals, a new company is usually created to make the bid, though there are a myriad of ways to execute a public-to-private deal, including private equity buyouts, management buyouts, or tender offers.
Initial Public Offering: The process by which a private company can go public with the first sale of its stock to the general public. In certain scenarios, this is a great way for companies to raise capital and become more liquid.
Enterprise Value: The measure of an organization’s total financial worth, often used to value a business prior to a potential investment. EV is calculated as market capitalization plus total debt less cash and cash equivalents.
Valuation Methodologies: There are many different approaches to calculating the value of an organization. The three most common valuation methodologies are: 1) Cost Approach: accounting for what it costs to build something and what the replacement value would be; 2) Market Approach: a relative valuation based on either public company comparables (“comps”) or benchmarking to similar, recent private company transactions, and 3) Discounted Cash Flow (DCF): valuing a business based on forecasted future cash flows while factoring in the weighted average cost of capital (WACC).
Valuation Multiples: A way of evaluating companies on a more equivalent basis by calculating ratios (one metric compared to another). Common valuation multiples include P/E (share price over earnings per share), EV/Revenue (enterprise value to revenue), EV/EBITDA (enterprise value over EBITDA), though there are plenty more used, depending on the scenario.
Due Diligence: The process taken prior to completing a transaction where a buyer completes a deep-dive analysis of the target company. Specific areas of due diligence most often include legal, financial, operational, and commercial.
Investment Banker: Blanket term for someone working for a bank or other financial institution who focuses on raising funds for businesses. The largest investment banks in the world include J.P. Morgan, Goldman Sachs, and Morgan Stanley.
M&A Broker: A professional (whether individual or firm) who helps companies transfer ownership between private companies. M&A brokers and advisors can support and represent either the buy-side or sell-side on transactions.
Merchant Banking: A company that offers financial services (loans, fundraising, underwriting, etc.) to large corporations or high net worth individuals (HNWIs). Merchant banks do not offer their services to the general public.
Private Equity: A form of alternative investment consisting of capital not listed on a public market. PE investments can be focused directly into private companies or buyouts (and delisting) of public companies.
Deal Team: The supporting team who help a business navigate a transaction. Key members of a deal team include an investment banker, an accountant and/or tax advisor, an attorney, and other advisors specialized in the industry and business, specifically.
Deal Flow: An investment term used to describe how quickly business proposals or investment pitches are coming in. This is a more qualitative measure of economic, or specifically segment, performance and activity.
Deal Origination: The process that investors use to identify potential opportunities. Some of this is handled internally, but often firms reach out to specialists to help identify targets that fit parameters specific to their investment goals.
Transaction Fees: Sometimes also referred to as a deal fee or a success fee, transaction fees are charged upon the completion of a successful transaction. This can be thought of as the equivalent of a realtor’s commission.
Post-Merger Integration: The process that businesses go through following a transaction to consolidate and optimize internal processes and procedures including organizational systems, people, and technology. PMI is a critical element to successful transactions and can often be overlooked throughout the M&A process.
Breakup Fee: Also referred to as a termination fee, a breakup fee is a penalty paid by either a buyer or seller if one party backs out of a deal. This can range anywhere from 1–3% of the total transaction value and helps to cover the time and resources dedicated to the deal process pre-transaction.
Cross Border M&A: When transactions take place with a buyer and seller who are headquartered in different countries or jurisdictions. This can create additional steps in preparing for a successful transaction.

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.