On the Margin
3 chains Yum should buy

3 chains Yum should buy

This post is part of the On the Margin blog.

Earlier this week, Yum! Brands Inc. executives suggested they would be “open” to the possibility of buying a fourth brand if the right deal came along. 

While the executives were ultra cautious in describing that openness — and they stressed that the company has plenty of growth without an acquisition — it’s important to note that they’re the ones who brought it up, rather than saying this in response to an analyst's question.

Which gets me to thinking: What, possibly, could Yum Brands buy that would work alongside KFC, Taco Bell and Pizza Hut?

Well, first, any company would likely be a quick-service concept, or perhaps a fast-casual chain. 

It would have to be relatively big, to have an impact on the 43,000-unit Yum Brands. And Yum would probably like a brand with growth opportunities, especially in international markets. It would also have to be a franchised brand, because the Louisville-based Yum is getting out of the restaurant operations business with its spinoff of its China market and its refranchising of some 2,000 locations.

A lot of companies would fit that bill. But then keep this in mind: Yum has a weak history of acquisitions since it was spun-off from PepsiCo in the 1990s. It acquired Long John Silvers and A&W Restaurants, only to sell them in 2011 when they were struggling. Likewise, its more recent purchase of the Little Sheep brand in China went nowhere. That emphasizes the need for Yum to make a huge splash if it were to dip its toes into the M&A pool again.

There could be three really good candidates for a potential Yum acquisition.

1. Subway. Subway is big. It doesn’t have much white space, which might limit future growth that Yum wants. Also, its U.S. market needs to be fixed, which might make the concept a less desirable acquisition — but which might also reduce its potential price in a sale situation. Subway would work well alongside Yum’s tacos, chicken and pizza. Its low cost, all-franchised model works, too, while its size would definitely provide Yum with more cash to pass on to shareholders. Subway does have international markets it is not in. And Yum could definitely step in and help the brand recover, much as it did with KFC in the U.S.

2. The Wendy’s Co. One type of concept missing from the Yum portfolio is a burger chain, and Wendy’s would fill that need nicely. Wendy’s is nearing completion of its refranchising effort, becoming more of a pure-play franchisor that relies on royalties from franchisees. It is also weak in international markets where rivals McDonald’s Corp. and Burger King play well. Yum could help Wendy’s fix that problem. If not Wendy’s, any number of burger concepts could be a potential target for Yum Brands — such as the Roark Capital-owned CKE Restaurants.

3. Dunkin’ Brands Inc. Dunkin’, the owner of Dunkin’ Donuts and Baskin-Robbins, would be an intriguing prospect. Dunkin’ would give Yum an even greater presence at breakfast. Dunkin’ Donuts has white space in the U.S., as well as internationally. And coffee is a commodity, something consumers drink frequently, even during downturns.

Honorable mentions. We considered several other concepts. We believe Yum would love to get its hands on something like Panera Bread, but it’s expensive and its CEO, Ron Shaich, is not going anywhere. Arby’s would fit well but its owner, Roark, is not known for selling anything. Investors in Noodles & Company are probably eager to sell, but the brand is small and mostly company run, and we think Yum investors would question the idea.

To be sure, the companies that Yum would buy would have to be up for sale, or at the very least, their investors or owners would have to be willing to consider the idea. In the case of Wendy’s and Dunkin’ in particular, their stock price performance in recent years probably makes an acquisition less likely.

Jonathan Maze, Nation's Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze

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