This post is part of the On the Margin blog.
In 2010, a private-equity group in Brazil with no history in the restaurant industry took Burger King private. The group, 3G Capital, paid a multiple of 8 times cash flow for the quick-service chain.
The multiple drew gasps. An 8 multiple in the aftermath of the recession was big at the time. And Burger King was a mess. It had weak sales and angry franchisees, and was a shadow of its rival, McDonald’s Corp.
Fast-forward seven years. Under 3G, Burger King has accelerated growth, generated positive same-store sales and mostly fixed relations with operators. It also merged with Tim Hortons in 2014, in an $11.4 billion deal.
This week, the chains' parent company — Restaurant Brands International Inc. — acquired Popeyes Louisiana Kitchen Inc. for $1.8 billion.
The multiple? Twenty-one times cash flow.
There are key differences between Burger King in 2010 and Popeyes in 2017. The chicken chain is in much better shape. Franchisee relations are strong. Restaurants are remodeled. Sales have been going up basically forever. Margins are larger. It’s also more of a growth chain.
Still, the price differential illustrates how much restaurant chains have increased in value over these past seven years. While people made a big deal out of Burger King’s 2010 price at the time, people are barely mentioning the price RBI is willing to shell out for Popeyes — though, as pointed out to me on Twitter, Bloomberg’s Gadfly did note that the price was the highest price ever paid for a restaurant company, based on multiple of revenue.
Restaurant companies are worth more now than perhaps they’ve ever been, at least if they’re strong companies with growth potential.
There are numerous buyers: Private-equity groups, strategic investors and even family offices, not to mention a long list of franchisees eager to grow their businesses.
Restaurants are drawing these investors in part because there is perceived safety in the restaurant industry. Stock valuations are high, which has set the market for acquisitions at higher prices.
Debt is cheap, which enables buyers to increase their offers because they’re spending less on the loan.
What’s more, a couple of these buyers — including RBI — are increasingly aggressive, targeting takeover targets and then enticing a sale with a strong offer.
These companies include the German conglomerate JAB Holding Co., which paid a multiple of 19 for Krispy Kreme Doughnuts Inc. last year.
These companies plan to keep their purchases over the long term, and they have specific plans in place to increase the output of those acquisitions — thereby rendering the multiple at least somewhat moot. In RBI’s case, the plan calls for cuts in general and administrative spending coupled with more aggressive unit growth. JAB, meanwhile, is collecting breakfast concepts like some of us collect stamps.
Many of these buyers weren’t targeting restaurants seven years ago. They’re doing so now, and the result is a huge multiple.
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: @jonathanmaze