The financial markets are expected to continue their robust momentum skyward in 2014. That means it’s a great time for restaurant companies to consider a sale or initial public offering, taking on a private-equity partner, or borrowing to fund new growth or remodels.
But there are clouds on the horizon. Federal Reserve officials have said they will begin in January to gradually taper the $85 billion monthly bond buying that has helped to stimulate the economy and kept interest rates low. That action could put a damper on activity within the restaurant space, said Kevin Burke, managing director of boutique investment banking firm Trinity Capital LLC in Los Angeles.
Here’s what’s expected in 2014:
Buying and selling
High valuations for restaurant companies will fuel more mergers and acquisitions, said Gary Levy, partner and hospitality industry director for CohnReznick in New York. “It’s a great time to be a seller,” he said.
In 2013, brands such as Johnny Rockets, Captain D’s, Carl’s Jr. and Hardee’s parent CKE Inc., Romano’s Macaroni Grill, Miller’s Ale House, Mastro’s Restaurants and Mimi’s Café all changed hands. More deals are likely in the first half of 2014, especially in casual dining, Burke said. TGI Friday’s, Ruby Tuesday and Red Lobster already are reviewing strategic alternatives.
Restaurant companies, especially strong growth concepts, should consider whether a sale is right for them and talk to an advisor about how to prepare, said Levy.
PE plays (with some exits)
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Private-equity players still have money in the wings, said Levy. And multi-unit high-growth restaurant concepts will be prime targets — possibly even those with earnings before interest, taxes, depreciation and amortization, or EBITDA, as low as $5 million.
In 2013, Catterton Partners invested in such emerging brands as 14-unit Piada Italian Street Food, 12-unit Protein Bar, six-unit Bruxie waffle sandwich chain and 10-unit Snap Kitchen. Others are expected to follow suit.
At the same time, the number of private-equity exits is expected to rise, as firms look to cash out on deals done five or six years ago, Burke said.
High valuations will expedite those exits, said Damon Chandik, managing director and head of the restaurant group for investment banking firm Piper Jaffray & Co. “A five-year hold is the average, but those holding for only three or four might get out early because the markets are doing well.”
Better access to capital
Large and middle-market companies, as well as franchisees of top-tier brands, will benefit from improved access to debt financing, but so will smaller companies, said Robert Bielinski, managing director of lender CIT, based in Chicago.
The ready access to debt financing will fuel franchisee consolidation as corporate stores are refranchised, older franchisees retire and well-capitalized operators seek greater scale, he predicted.
Terms will be borrower-friendly, he added, and competition among lenders makes it a great time for restaurant companies to talk about increasing existing or establishing new credit facilities.
Agustin Carcoba, president and chief executive of GE Capital, Franchise Finance in Scottsdale, Ariz., said, “Longer tenors may appear as the Fed starts to reconsider quantitative easing, but I don’t expect access to credit to be disrupted.”
But just because you can borrow doesn’t mean you should. With more lenders keen to get into the restaurant space, “it feels a lot like it did in 2005 and 2006, and we all know what happened after that,” Chandik said.
A slowdown in IPOs
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More initial public and secondary offerings are likely next year, given the large number of private and closely held firms in the restaurant industry.
Checkers Drive-In Restaurants Inc., Focus Brands Inc. and Zoes Kitchen are already reportedly lining up to go public. And the parent to the Papa Murphy’s Take ‘N’Bake pizza chain is also rumored to have IPO potential.
In 2013, investors went after fast-casual chains like Noodles & Company and Potbelly Corp with gusto, doubling stock prices in the first day of trading. And contractor Aramark Holdings Corp. successfully raised $725 million with its IPO. But investor restraint set in late in the year, and that’s likely to carry into 2014, Burke said.
Companies considering an IPO should “do it quickly,” he said. “Be amenable on price and terms, and best to do it in the first half of the year than the second.”
Waning love from Wall Street
By late December 2013, the NRN Restaurant Index of public restaurant companies had largely outperformed indices like the New York Stock Exchange as of mid-December. But what happens on Wall Street in 2014 depends largely on the recovery of the American consumer.
While restaurant industry same-store sales had modestly improved late in the year – except for casual-dining concepts – guest traffic remained in decline.
Though macro trends are improving in general, said Chandik, “There’s still a divergence between valuations and what a lot of operators are seeing at the store level.”
Contact Lisa Jennings at [email protected] .
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