On Thursday, my colleague Lisa Jennings wrote about a report that a fast food operator out of the Philippines named Jollibee Foods Corp., is interested in a U.S. quick-service chain worth at least $1 billion.
And analysts have been piling on. Janney Capital Markets Analyst Mark Kalinowski named six candidates, including Jack in the Box and Krispy Kreme. Stephen Anderson, analyst at Miller Tabak + Co, mentioned Dunkin’ Brands, given Jollibee’s relationship with Dunkin’ in China.
But if Jollibee, or anybody else for that matter, wants to take a public restaurant chain private, it had better get prepared to pay up. A lot.
Restaurants on Wall Street are expensive right now, and that’s especially true for quick-service chains with some growth potential — the types of concepts Jollibee would apparently target.
To understand this, go back to 2013. Restaurant stocks went crazy that year. They rose 45 percent on average, and numerous companies doubled their per-share price. While stock growth was much more modest in 2014, for the most part restaurant stocks kept their value.
And those values are high. The vast majority of restaurant companies on Wall Street are trading at enterprise value multiples of more than 10 times EBITDA. QSR chains are trading at even higher levels. Many of the companies that have been said to be potential targets are already at valuations well above 15 times EBITDA.
The enterprise value multiple is an imperfect measure, but it gives an indication of how much it would take to buy a publicly traded company. For a restaurant company, a double-digit multiple is considered high in an acquisition scenario.
And consider that a buyer would have to make a deal attractive to shareholders by offering a price for a company that is well above the current value. The result is that a purchase of a public restaurant brand is expensive.
Private equity groups, which are responsible for turning these purchase multiples into profits down the line, are generally reluctant to pay double-digit multiples. Jollibee would likely need a private equity partner to do a big deal in the U.S.
To be sure, it’s not out of the question. Burger King Worldwide, controlled by the private equity firm 3G Capital, likely paid a multiple of more than 13x EBITDA for Tim Hortons Inc. late last year. But strategic buyers are frequently willing to pay higher multiples for concepts than are private equity groups.
Indeed, when we spoke with KeyBanc’s Brad Swanson about his predictions looking ahead to 2015, he suggested there would be fewer leveraged buyouts of publicly traded restaurant companies because of current valuations. Those valuations have only gone up since then — restaurant stocks are up 2.5 percent so far this year, according to the NRN Index.
Many of the names brought up by analysts are already expensive. Jack in the Box would fit some of the criteria established by Jollibee in the report. Jack operates regional chains with plenty of growth potential. But it also has a multiple of nearly 14 times EBITDA and a market cap of more than $3 billion.
Krispy Kreme Doughnuts, Inc., would be more affordable, with a market cap of $1.3 billion. But it still has an enterprise value multiple of more than 20 times EBITDA.
And Dunkin’ Brands would be a real chore for any buyer, with an enterprise value of $6.5 billion and a multiple of 18.
Other brands mentioned, including El Pollo Loco (EV multiple – 19.5x), Popeyes Louisiana Kitchen (20.6x), Fiesta Restaurant Group (20.4x) and Sonic Corp. (14x), would also be costly acquisitions.
None of this is to say that a buyer like Jollibee couldn’t pay up for a publicly traded QSR, especially if that buyer doesn’t need much debt and is an operator that could easily turn a profit. And as Kalinowski noted, Jollibee is a “highly successful company.”
In addition, debt is cheap, which is helping to offset some of the high prices being paid for restaurant chains.
But a buyout of a publicly traded QSR would seem unlikely for now, at least until some of these prices come down.