This story is part of NRN’s Top 100 special report, a proprietary census ranking the foodservice industry’s largest restaurant chains and companies by sales and unit data, among other metrics. The full report is available only to Nation’s Restaurant News magazine subscribers, and is part of the June 25 issue. Subscribe here.
The foodservice industry’s largest companies shifted billions of dollars in 2011 and 2012 through mergers and acquisitions, restaurant refranchising efforts and the booking of revenue from past deals, creating a universe totaling $122.72 billion in U.S. corporate foodservice revenue.
The standouts in this edition of Nation’s Restaurant News’ Top 100 company census include the first-time listing of Burger King’s newest private equity parent, 3G Capital Partners Ltd.; a stronger-than-ever Fertitta Entertainment Inc., which took its own Landry’s Restaurants private under new ownership; and Roark Capital Group, which appears here following the acquisitions of Arby’s and Corner Bakery Cafe. Roark previously had been included in the Second 100 report.
On the flip side, restaurant company heavyweights including DineEquity Inc., Jack in the Box Inc. and Yum! Brands Inc. each saw double-digit or high-single-digit declines in U.S. corporate foodservice revenue, mainly as a result of their refranchising initiatives that moved money out of corporate top lines and into franchisee operations.
The NRN Top 100 census, and its upcoming Second 100 study, follows the money of parent companies separately from restaurant brands’ systemwide sales. In the Top 100 company report, 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 foodservice brand is split between the selling and buying parties in pre-acquisition and post-acquisition figures. Finally, when a corporate entity no longer exists following a transaction, such as in a going-private deal, that entity is not represented in the study.
The top lines
This year’s study, which accounts for revenue booked during the fiscal years ended closest to December 2011, saw aggregate U.S. foodservice revenue increase 8.75 percent to $122.72 billion. These same Top 100 companies booked revenue of $112.84 billion for the fiscal year ended December 2010, an increase of 4.28 percent from the prior year.
But as most revenue is generated from deal making rather than restaurant-chain sales, the story lines exist in the swapping of corporate ownership.
“Much of the latest-year gain in revenue was statistical in nature resulting from the timing of preceding-year acquisitions or changes of company ownership,” said Alan J. Liddle, managing editor of special projects for NRN and database manager for the Top 100 project. “It is not necessarily indicative of the changing level of money generated by the industry’s foodservice establishments during the period in question.”
It is indicative of the constant shifts in restaurant-chain ownerships. Those include private equity purchases or sales, strategic mergers, or the changing corporate strategies of large franchisors, many of which are headed toward becoming a fully franchised model, decreasing the number of company-owned restaurants and therefore company-owned restaurant sales.
The five largest growth companies in the Top 100 study, or those that booked the largest year-to-year increases in U.S. foodservice revenue, each saw their numbers surge from acquisitions rather than foodservice sales gains.
The largest gainer, Caesars Entertainment Corp., booked an 883.52-percent increase in latest-year revenue, reflecting the company’s first full year of control of the casino and resort operations of Harrah’s that in the past fell under a co-ownership by Apollo Global Management LLC and Texas Pacific Group.
Centerbridge Capital Partners LP was the second-largest growth company in the Top 100 universe, booking a 659.32-percent increase in latest-year U.S. foodservice revenue, which reflected its first full-year of ownership of Rock Bottom Restaurants Inc. and Gordon Biersch Brewery Restaurant Group Inc. Post-acquisition, Centerbridge renamed the acquired brands Craftworks Restaurants & Breweries. Centerbridge, which did not rank in the Top 100 last year, promises to become an even larger player. The New York-based private equity firm agreed in May to purchase P.F. Chang’s China Bistro Inc. for $1.1 billion. Because that transaction was announced after the close of fiscal year 2011, revenue associated with P.F. Chang’s or its sister brand Pei Wei Asian Diner were not included in the study.
This year also saw Roark Capital Group surge to the 36th spot in terms of total revenue and the 4th spot in terms of growth because of its acquisitions of Corner Bakery and Il Fornaio in June 2011 and of Arby’s in July 2011. The private equity group also benefited from its first full year of ownership of the Auntie Anne’s restaurant chain, which it purchased in 2010.
Foodservice gainers by acquisition aside, it’s no surprise that revenue gainers by sales were parent companies to some of the star restaurant chains. Buffalo Wild Wings Inc., Chipotle Mexican Grill Inc. and BJ’s Restaurants Inc. each saw systemwide sales gains for their chains and, subsequently, corporate revenue gains.
Among the heaviest decliners in revenue growth, or the five companies that ranked lowest for growth in the Top 100 company census, three reported lower revenue mainly because of refranchising plans.
DineEquity Inc., the parent company of Applebee’s and IHOP, saw its fiscal-year 2011 U.S. foodservice revenue fall 25.02 percent to $801.7 million from the $1.07 billion booked in the previous year. The decline was almost wholly based on refranchising efforts within the Applebee’s system, or the sales of company-owned restaurants to franchisees. Since acquiring Applebee’s in November 2007, DineEquity has sold 342 Applebee’s locations to franchisees, nearing a 99-percent-franchised model. DineEquity long has argued that a franchise business model is less capital intensive and less vulnerable to cash-flow volatility. Another company that saw declines in corporate revenue from refranchising efforts is Jack in the Box Inc., which booked a 14.94-percent decline.
The numerous transactions that surround refranchising efforts are plentiful and varied, from Carrols Restaurant Group’s latest deal to acquire 278 Burger King locations from the chain’s parent company for equity and cash, to first-time Applebee’s franchisee American Franchise Capital, which purchased 33 locations for about $26 million.
A broader look at M&A
Looking outside the Top 100 universe and including the entire restaurant space, the number of chain restaurant merger-and-acquisition announcements in 2011 increased to 100, up 12 percent from the 89 recorded in 2010, according to J.H. Chapman Group LLC, an investment bank in Rosemont, Ill. The majority of those transactions, or 46 percent of the census, represented franchised-restaurant sales activity, said the company, which compiles a restaurant deal-making census each year.
“Chain-restaurant M&A transactions continue to increase largely due to franchised-restaurant sale activity,” said David Epstein, a principal at J.H. Chapman. “In 2011 both franchisors and franchisees announced many more transactions as a percentage of all transactions than in recent years, mainly due to the increase in franchise financing and refranchising programs.”
Acquisitions within the buyer’s own brand were up 17 percent from the previous year, J.H. Chapman research showed.
Equity funds also approached franchisees, representing eight transactions in the sector, including Prometheus Partners’ acquisition of 21 Pizza Hut units from Commodore Restaurants, Olympus Partners’ acquisition of NPC International, Golden Gate Capital’s tender of California Pizza Kitchen, Brentwood Associates’ acquisition of K-Mac Holdings and Advent International’s management sponsor in the acquisition of 500-unit Bojangles’ Famous Chicken ‘n Biscuits.
Commenting on the 2012 outlook for M&A activity in the chain-restaurant industry, Epstein said: “The recession produced several exciting new concepts [that] have proven consumer acceptability and now need capital to expand. Equity funds continue to have the necessary capital and interest in the industry. We foresee several such investments in 2012 along with purchases of larger chains by both equity funds and strategic buyers.”