Movers and shakers

From PE purchases to bankruptcy sell-offs, deals abound among Top 200

The Nation’s Restaurant News Top 200 universe, including the Top 100 and the Second 100 qualifiers, saw merger-and-acquisition activity grow significantly from years past, resulting in bellwether corporate entities such as Burger King Corp. and Landry’s Restaurants Inc. being replaced by new owners that had never before booked foodservice revenue. 


Between bankruptcies, franchisor-franchisee transactions and private-equity deals, the restaurant industry saw a wave of deal making that, while not as big as the swell of transactions in the heyday from 2006 to 2008, was still well above the activity registered in 2009. 


According to NRN Top 200 research, at least 40 transactions took place or were announced in the period from January 2010 to June 2011. Those included some of the largest deals, such as Burger King’s sale to 3G Capital Partners for $4 billion, as well as smaller transactions involving regional franchisees, such as the sale of 14 Wendy’s restaurants in the Indianapolis market to franchise operator Cedar Enterprises Inc.


Activity was even greater if transactions involving companies outside of the Top 200 universe are counted.


According to J.H. Chapman Group LLC, a investment bank in Rosemont, Ill., restaurant merger-and-acquisition activity — which the firm counts as the announcements of deals, regardless of whether they closed — increased to 89 instances in 2010, up 33 percent from the 67 announcements recorded in 2009. The firm’s report was released in March and covered the 2010 calendar year.


“Activity is stronger than last year, although it has not reached the record level of five years ago,” said David Epstein, a principal at J.H. Chapman. “In 2010 there was more availability in the credit markets for acquisition financing and fairly reasonable valuations. Combined with an abundance of equity capital and the need for restaurant-growth financing, this produced a fairly robust marketplace for restaurant chains.”


Equity funds continued their restaurant-buying binge, nearly reaching the levels achieved in 2007 and 2008, according to J.H. Chapman research. Private-equity deals accounted for 36 percent of all announced transactions in 2010. Roark Capital was part of that 2010 uptick with the acquisitions of Wingstop and Auntie Anne’s. This year Roark has acquired Corner Bakery, Il Fornaio and a majority share in Arby’s. 


Franchise-related transactions were also up significantly, the firm’s report showed. Acquisitions within a buyer’s own brand rose 33 percent from the previous year. The increase in franchise purchase activity largely reflected the numerous refranchising programs initiated years ago by such chains as Applebee’s, IHOP, Jack in the Box and Jamba Juice.


Transactions involving financially troubled companies rose 150 percent from the year earlier, nearly equal to those reported in 2008, when the economy began its steep decline into a recession, the J.H. Chapman study showed. Among such transactions, many of which involved restaurant brands that had filed for bankruptcy protection, were American Blue Ribbon Holdings’ acquisition of 96-unit Max & Erma’s, a move by debt holders of Uno Chicago Grill to convert their debt to stock, Luby’s acquisition of Fuddruckers and Landry’s purchase of Claim Jumper, to name a few.


The NRN Top 200 census follows the money of parent companies, meaning revenue is booked to the corporate entity only while that entity owns the controlling interest in a restaurant brand. When a transaction results in a restaurant trading hands, foodservice revenue from that restaurant brand is split between the selling and buying parties in pre-acquisition and post-acquisition figures. Even more, when a corporate entity no longer exists after a transaction, such as in a going-private deal, for example, that entity is not represented in the study. 


The timing of merger-and-acquisition activity, with so many occurring toward the middle or end of 2010, meant that $3.82 billion in latest-year revenue fell out of this year’s Top 200 study. 


“Many new owners did not qualify, and older owners lost post-acquisition revenue, meaning billions of dollars are not represented,” said Alan J. Liddle, managing editor of special projects for NRN and database manager for the Top 200 project. “But there is no doubt that money will come roaring back next year.”


Take, for example, Burger King Holdings Inc., the former owner and franchisor to the 12,000-plus-unit Burger King chain, which had always placed in the Top 100 corporate universe, hitting No. 19 in last year’s report. The corporate entity no longer exists, having completed a going-private buyout with 3G Capital in October 2010. The new owner, 3G, only able to technically book less than three months of revenue, or $277 million of Burger King’s estimated full-year U.S. revenue of $1.37 billion, was pushed to No. 109 in this year’s report.


Landry’s Restaurants Inc., the former restaurant-and-gaming corporation, faced a similar fate after an October 2010 going-private buyout by new corporate entity Fertitta Entertainment Inc., controlled by investor and Landry’s founder Tilman J. Fertitta. Just three months of revenue qualified Fertitta Entertainment at No. 133, while Landry’s Restaurants — which no longer exists — was ranked No. 38 in last year’s report.


Looking at merger-and-acquisition activity in 2011 and beyond, J.H. Chapman’s Epstein said the level of transactions is more difficult to predict. He noted that many troubled companies already completed their needed deals, while other deals are slated to close this year and next.


“We expect refranchising to continue, especially among leveraged franchisors, and believe that the large chain spinoffs, such as A&W, Arby’s and Long John Silver’s, to name a few, will be completed during the year.” 


Contact Sarah E. Lockyer at [email protected] [3].