Private Equity Aims at Franchise Fixer Uppers

October 5th, 2018 by Ritwik Donde

Franchise restaurant M&A is making a comeback, but this time with a difference. Instead of targeting privately held franchises, investors are largely favoring publicly listed franchises this year. The number of “public-to-private” deals, where a private equity group buys a listed company, hit 152 last year, up from 94 in 2016. The all-time high of 196 transactions was hit in 2007, while the record value for such deals was $423bn in 2006.[1] Private equity groups are buying public companies at the fastest rate since before the financial crisis, with deals totaling $180 billion last year, nearly twice the level of 2016.[2]

Public-to-private trend started with Einstein Bagels’ and Krispy Kreme, which were scooped by Luxembourg-based JAB Holdings. This trend was later continued by the same private equity buyer with the $7.5 billion acquisition of Panera Bread. In 2017 3G Capital (owners of Restaurant Brands International) took private franchises like Popeyes’ and Tim Hortons. 2018 saw this trend continued by private equity giants, Roark Capital Group and private investors like the Cava Group. Roark acquired the publicly traded Buffalo Wild Wings and Sonic Drive-In; while The Cava Group acquired Zoe’s Kitchen.

Franchises Taken Private Investors Deal Sizes Year of Acquisition
Einstein Noah Restaurant Group JAB Holding Co. $374 million 2014
Tim Hortons 3G Capital $11.4 billion 2014
Krispy Kreme JAB Holding Co. $1.35 billion 2016
Buffalo Wild Wings Roark Capital Group $2.9 billion 2017
Ruby Tuesday NRD Capital $146 million 2017
Panera Bread JAB Holding Co. $7.5 billion 2017
Popeye’s 3G Capital $1.8 billion 2017
Qdoba Apollo Global Management $305 million 2017
Zoe’s Kitchen Act III Holdings (The Invus Group, SWaN & Legend Venture Partners and Revolution Growth) $300 million 2018
Sonic Drive-In Roark Capital Group $2.3 billion 2018
Jamba Juice Roark Capital Group $200 million 2018

*Source: FRANdata Research

The impact of large public-to-private deals can be seen on the FRANdex, an index for publicly traded franchise companies developed by FRANdata. In Q2-2018, M&A activity and stock splits largely led the index to underperform both the S&P 500 and Russell 2000. Such public-to-private M&As resulted in reducing the overall market capitalization for the index as companies like Popeye’s, Ruby Tuesday, Buffalo Wild Wings and Panera Bread ceased to trade on the public markets after getting acquired.

One of the reasons for such aggressive acquisition strategy from PE investors could be attributed to the higher volume of “dry powder” available with them. Just last year, there PE investors had $1.1 trillion in “dry powder” ready to spend around the world, with another $950 billion being raised by 3,050 firms.[3]

At the same time, publicly traded restaurant space became very crowded following a slew of initial public offerings (IPOs) the past several years. Many of those stocks struggled, leading to cheaper pricing. Zoe’s Kitchen (had very few franchises), which went public in 2014, is a great example. The deal price at the time of its acquisition of $12.75 per share represented a 33% premium for a stock that traded in the mid $30s just two years ago. It was a fresh restaurant concept and had great promise. However, that promise has not yet translated to the bottom line. Many investors gave up on Zoe’s, and the stock will be acquired rather cheaply. In this case, it was a buyer’s market.[4]

It also is becoming increasing onerous for companies to remain listed on global bourses. Among the burdens include arduous filing requirements and the knowledge that routine business decisions may become the subject of caustic public debate. Take the case of Dine Brands here. The company’s stock prices took a huge hit due the litigation with one of its largest franchisees, declining from high 80s to low 60s in just months after the news came out. The result is that the value of public companies being taken private continues to rise.

These so-called take-private deals worldwide have now reached a decade high of $109 billion in 2017. In the first quarter of 2018, such deals totaled $12 billion, the heftiest amount for an opening quarter in the last five years.[5]

The trend is not expected to slow down any time soon, as more and more publicly traded franchise restaurant concepts continue to be impacted by economic and consumer changes. Bain has identified 72 potential listed targets in the US alone that represent a “rich hunting ground”. The companies have an enterprise value of up to $50bn but are relatively inexpensive, trading at below nine times earnings before interest, tax, depreciation and amortization.[6]

[1] Financial Times

[2] Bain Report on Private Equity Transactions 2018

[3] The Economist

[4] The Street

[5] Reuters

[6] Bain & Company