Imagine operating a single restaurant. The food keeps bringing them in, and prices are relatively stable. Consumer confidence is high, unemployment low, discretionary income rising, and people are going out more. Now multiply these variables as if we operated a chain of restaurants, and you will find small changes in any of these variables are multiplied exponentially and take a longer time to adjust for a restaurant chain. By looking across the industry, we can see that big changes may just be beginning, and we can join the change now.
Restaurants continue see investment money pouring in. Papa John’s and Jack in the Box are just two of many franchised restaurant chains undergoing due diligence for acquisition. Focus Brands, Inc., owner of Carvel, McAlister’s, Jamba Juice, Auntie Anne’s, Moe’s Southwest Grill, Schlotzkey’s and Cinnabon, bought Jamba Juice in September 2018 for approximately $200 million. On October 29, 2018, Focus Brands issued $300 million in additional bonds under it securitization facility with an interest rate of 5.184%. The bonds are securitized by royalties and revenues from the other chains under the Focus Brands umbrella. Undoubtedly, unit economics support this financial engineering of debt, but it seems relatively easy to fund big spends for acquisitions. Is this special to the restaurant sector?
Big acquisition spends are not only prevalent for healthy companies but also distressed companies. Taco Bueno Restaurants, Inc. filed Chapter 11 on November 6, 2018 for its 140-unit company store and 29-unit franchised Mexican units. The reason it filed was because of falling earnings and underperforming restaurants. But Sun Holdings, a multi-concept franchisee listed as the 8th largest franchisee in the U.S., is the stalking horse bidder. Sun acquired the outstanding debt of $130.9 million for about half price and will inject $10 million into operations, and convert its debt claims into ownership of the company. Sun is doubling down on the franchised business.
Similarly, Papa Gino’s and D’Angelo’s filed Chapter 11 on November 6, 2018 for their 141 company owned branded locations, and was franchising 37 locations. It had once been as large at 370 units. A stalking horse bidder, Wynnchurch Capital, acquired the senior debt of $18.5 million and the second lien position of $34.2 million. Wynnchurch has agreed to provide debtor in possession financing of $13.8 million. There is another $39.9 million in mezzanine financing held by Hartford Insurance Company and Brookside Mezzanine Fund.
Is there more capital available than good ideas and strong restaurant operators? Why are knowledgeable people placing bets on restaurant chains rather than home builders, car manufactures, and other industries? This abundance of capital has resulted and continues to result in the ongoing consolidation of Big Restaurant, franchisors and large franchisees able to leverage their assets and G & A costs. Family offices and private equity are increasing their investment in this sector because of the low barriers to entry and expansion. It allows retirees to buy franchises on credit, and consolidate their holdings to expand. Is there still more upside than downside?
We’ll answer that question in our next post.
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