21 January 2014

Is restaurant M&A on the menu?

From small burger chains to children-centric diners, dealmaking within the restaurant industry in 2014 has already started on a high note and those lucky enough to be listed are benefiting from successful initial public offerings from the likes of Potbelly Sandwich Works and Noodles.

Just last week shares in BurgerFuel Worldwide soared 80 per cent on news a company linked to the co-founders of Subway is snapping up a 10 per cent stake with a view to helping the New Zealand burger chain break into the US market. Franchise Brands, formed to inject money into and offer guidance to small and mid-market companies, is coming on board as a backer as part of a deal to help grow the Auckland-headquartered gourmet brand operator by providing knowledge and support, as well as helping pursue global development opportunities. The deal value for the 10 per cent stake is small, totalling a mere NZD 8 million (USD 7 million) comprising a placement of new shares and the sale of stocks from existing shareholder Mason Roberts Holdings. However, all companies, no matter how large, started off small with big ideas and M&A is certainly picking up in the sector one way or another.

Just look at CEC Entertainment, the US group that owns family-friendly pizza restaurant chain Chuck E Cheese. After sounding out potential suitors with the help of Goldman Sachs, the Texan company has attracted a USD 1,300 billion takeover bid from Apollo Global – the largest deal by value targeting a company operating in the restaurant industry so far this year, according to Zephyr, the M&A database published by Bureau van Dijk. Incidentally, not only is the acquisition one of sector’s top 20 announced deals by value in the last decade but is also one of the ten largest leveraged buyouts of a US restaurant chain.

M&A is building on a flurry of dealmaking last year; a local example would be Tesco acquiring family-focused chain Giraffe for USD 72 million in March while Hutton Collins Partners spent USD 162 million on Byron Hamburgers, the UK-based burger restaurant operator owned by Cinven’s Gondola Holdings. Starboard Value took a stake in Darden Restaurants and Roark Capital acquired Miller's Ale House from KarpReilly and Jack Miller, both US-based companies, among others.

However, there are always ups and downs within sectors. Ruby Tuesday took a hit in trading recently after reporting its financial struggles are continuing with a greater-than-expected loss of 43 US cents from continuing operations for the quarter ended 3rd December 2013 and announced it would close 30 restaurants within the next three months. The results came weeks after Debtwire reported the Tennessee chain has hired Goldman Sachs to evaluate strategic options, which tends to be code for looking into a sale. Meanwhile, Darden’s decision to spin off its Red Lobster seafood business has failed to pass muster with certain shareholders after activist hedge fund Barrington Capital, which holds more than 2 per cent of the Floridian owner of Olive Garden and the Capital Grille, called the proposal “incomplete and inadequate”.

According to the National Restaurant Association, restaurant sales are expected to rise for the fifth consecutive year to more than USD 683 billion in 2014, despite a challenging economic landscape which includes food and labour costs. However, it is not known how this projected growth will translate into dealmaking within the industry, especially considering the difficulties faced. Bob Bielinski, managing director of CIT Corporate Finance, Retail and Restaurants, told Reuters that buyers are particularly concerned about valuations and how they would get an acceptable return on investment, especially with larger chains.

© Zephyr