This post is part of the On the Margin blog.
The investment firm JAB Holding Co. has bought a lot of coffee and breakfast chains recently.
Dunkin’ Brands Inc.’s flagship concept, Dunkin’ Donuts, sells coffee and breakfast.
In Wall Street’s eyes, that means JAB may soon come for Dunkin’, and talk of a potential buyout helped Dunkin’s stock surge nearly 8 percent on Monday.
Private equity groups are still interested in restaurants, and perhaps nobody has been making as big a push into this industry as JAB, the investment firm from the Reimann family out of Luxembourg.
We’ve felt for a time that JAB would eventually buy Dunkin’, given JAB’s seemingly insatiable appetite for breakfast chains as well as Dunkin’s vast potential. Dunkin’ periodically is subject to sale rumors, and few buyers have the wherewithal to take the company private — JAB is one of them.
Instead, JAB went out and bought Panera Bread. That calmed down rumors of a Dunkin’ acquisition, but those are apparently over.
Theoretically, nobody has any business buying Dunkin’ right now. The stock is near its all-time high after Monday’s trading, and now has an enterprise value multiple of just under 16 times EBITDA — or earnings before interest, taxes, depreciation and amortization.
Any buyer would have to exceed that multiple by a couple of turns to entice investors and the company to sell. Dunkin’ has a ton of white space for expansion in the U.S. It has some interesting plans to convince consumers to buy more of its coffee. And it has a lot of growth potential in international markets.
This is why JAB makes sense. The firm is no stranger to sky-high multiples — it paid nearly 22 times EBITDA for Peet’s in 2012. The $7.5 billion acquisition of Panera was at a multiple of 19.5.
Those are the types of multiples that JAB is willing to pay, and it’s the type of multiple JAB would have to pay in this instance.
How much would Dunkin’ cost? Consider this: A 25-percent premium on Dunkin’s share price right now would give it a multiple close to 19. A 33-percent premium would give it a multiple of about 20 and would be a deal valued at about $9 billion.
Baird Analyst David Tarantino speculated that Dunkin’ could fetch an 18x multiple. I think that’s on the low end of what it would take to buy the company.
Traditionally, buyers don’t like paying these sorts of multiples for established chains because they usually want to sell them or go public again in a few years — and they want to make money on those investments.
Because JAB has no such timeline, it is willing to pay a high price to get what it wants, much like Burger King owner Restaurant Brands International Inc.
But there are risks associated with any such deal. The coffee market is incredibly competitive. Dunkin’ faces competitors from Starbucks Corp. to McDonald’s Corp., as well as a slew of convenience stores. RBI’s Tim Hortons is also working to muscle in on Dunkin’s turf.
Then again, with a portfolio that includes Peet’s, Caribou Coffee, Einstein, Panera, Stumptown Coffee Roasters and others, JAB seems unconcerned about coffee competition.
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]
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