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BFD Expert Voices - Retail Deals

BFD Expert Voices

Restaurants have become a magnet for private equity firms, a dynamic set to drive more M&A in the space.

Why it matters: PE investment in the consumer sector has otherwise largely contracted.

The big picture: Restaurants have enjoyed a post-pandemic boom as more consumers seek experiences and dine out.

Meanwhile, several sponsors are facing increasing pressure to sell restaurant assets they've previously held off on bringing to market, Axios reported earlier this year.

Zoom in: There "continues to be a halo around the franchiser model," says Christopher Sciortino, who leads Baird's multi-unit, restaurant and franchising practice.

Franchisers have good cash flow, a motivated franchisee base, and are asset-light.

"Given the cost of capital today, it certainly helps to have a business that doesn't have large capex requirements," he says.

Case in point: Blackstone acquired Tropical Smoothie for about $2 billion.

U.S. system sales for the smoothie chain were nearing $1.3 billion, according to Technomic Ignite data.

"Not only were they opening units at a very strong clip, and those units were performing successfully, but they had a very strong backlog of new units that will be opening," Darren Gange, a director at investment bank DC Advisory, says.

"There's a very clear roadmap that next year, earnings should be higher for that," and that commands a valuation premium, he adds.

State of play: Some of the biggest transactions in the past year have been driven by financial sponsors, according to Dealogic data.

Roark Capital Group has inked a deal to acquire Subway in a roughly $9.6 billion buyout (the sandwich chain is currently undergoing a $3.35 billion bond sale).

Apollo Global agreed to take private Wagamama parent Restaurant Group for roughly $623 million.

Bain Capital agreed to acquire Brazilian steakhouse chain Fogo de Chão for about $1.1 billion.

Limited-service restaurants — like Taco Bell, McDonald's and KFC — are also favored by sponsors as they don't require as much capital for food, labor costs and rent, Gange says.

The multi-concept restaurant holding company model — e.g., Roark's Inspire Brands — is attractive too, with purchasing power synergies that make it easier to compete on price and product.

What they're saying: "Because of competitive dynamics and uncertain consumer environment, I think investors have a bit of a bias against more modest levels of unit growth," Sciortino says.

Healthy same-store sales growth should tell the story, and it can be "the most compelling and interesting" for an investor or a company looking to expand its footprint, he says.

Caveat: The space has been challenged with Red Lobster and Tijuana Flats declaring bankruptcy this year.

"In an environment where traffic might be challenged, you've got a lot of leverage, and you've got inflation and costs, that's a recipe for struggle," Stephens restaurant banker Sarah Gill Campbell says.

"In restaurant land, there's not a lot of assets to sell. Your assets are your people," she says.

Whether distressed assets represent good M&A opportunities, Campbell says, "It all depends on whether it's a good business, bad balance sheet or a declining business."

Private equity's taste for restaurants

PE firms' interest in restaurants is likely to spur more M&A in the sector.

Illustration of golden food takeout containers.

Mergers and acquisitions

Restaurants have become a magnet for private equity firms, a dynamic set to drive more M&amp;A in the space.Why it matters: PE investment in the consumer sector has <a class="gtmContentClick" data-vars-link-text="otherwise largely contracted" data-vars-click-url="https://www.axios.com/pro/retail-deals/2024/05/13/private-equity-investment-consumer-q1-first-quarter-pe-multiyear-low" data-vars-content-id="2bf87cc4-c5b6-472e-a0a6-2d7be4fc9c75" data-vars-headline="Private equity&#x27;s taste for restaurants" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/pro/retail-deals/2024/05/13/private-equity-investment-consumer-q1-first-quarter-pe-multiyear-low" target="_self">otherwise largely contracted</a>.

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Private equity's taste for restaurants

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