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Private equity's taste for restaurants

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Jun 3, 2024
Illustration of golden food takeout containers.

Illustration: Gabriella Turrisi/Axios

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.

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."
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