Equity Funds Continue to Buy Restaurants in 2012

Equity Funds Continue to Buy Restaurants in 2012

The J.H. Chapman Group, an investment banking firm specializing in mergers and acquisitions in the food and restaurant industries, has published its 2012 Chain Restaurant Merger & Acquisition Census, an annual guide to acquisition activity in the retail foodservice industry. The report was developed and analyzed by Chapman Principal David Epstein and provides perspectives on restaurant industry trends. A link to a free copy of the 2012 Chain Restaurant Merger & Acquisition Census is available at the end of this article.

The Census-captured 96 announcements in 2012, slightly less than the 100 reported in 2011 and 8% more than the 89 recorded in 2010. “Chain restaurant M&A transactions have leveled off over the past three years as IPO and other growth financing methods increase in frequency,” said Mr. Epstein. “In 2012 there were eight announced chain initial public offering announcements and six public chains going private. At the same time chain franchisees announced acquisitions of franchised units in 36 % of all non public transactions. Equity fund purchases again contributed significantly to this year’s activity.”

Equity funds continued to buy restaurant chain brands, accounting for 27% of all announced transactions. Equity funds have contributed significantly to the robust chain restaurant M&A market, representing 31% of all non-public chain restaurant transactions in the six years since 2007. The Census has captured 171 equity fund announced transactions during this time period. Equity funds investing in new concepts in 2012 included Bruckman, Rosser Sherill’s investment in 17 unit Not Your Average Joes; Fidelity National’s acquisition of upscale casual J. Alexander’s, Thomas H. Lee Partners acquisition of international Fogo de Chao and Sentinel Capital’s acquisition of 393 unit Huddle House.

Franchise unit transactions, while significant this year, were down from 46% of all 2011 Census-captured transactions. Acquisitions within the buyer’s own brand represented 90% of all franchised unit acquisitions, which reflect the easing of bank financing extended to proven operators. Major contributors to this year’s franchise purchase activity were all of the Yum! Brand concepts and several transactions in the Burger King system. “It is now more common for franchisee organizations to consider synergistic acquisitions as a key component to their growth strategy,” said Mr. Epstein.

International chain acquisitions by domestic operators was down significantly from last year; however five foreign companies announced acquisitions of domestic chains, including the merger of Justice Holdings with Burger King Worldwide, European Quilvest’s acquisition of Anthony’s Coal Fired Pizza, Canada-based Fran Work Group purchase of Elephant & Castle and German-based John A. Benckiser Group acquisition of Caribou Coffee.

Initial public offering plans announced in 2012 included Dave & Busters, Bloomin Brands, Chuy’s Tex Mex, CKE Restaurants and Del Frisco. Going private transactions included Teavana by Starbucks, J. Alexander’s by Fidelity National, Benihana by Angelo, Gordon & Co and P.F. Changs by Centerbridge Partners.

Financially troubled restaurant chains were purchased less often in 2012 than in the last two years. The availability of bankrupt restaurant chains has fallen as chains work with lenders and landlords to find alternative structuring solutions. Since 2007, acquisitions of chains in financial trouble, including bankruptcy sales, averaged 16 transactions per year. For 2012 twelve troubled company transactions were captured.

Operators looking for new growth opportunities contributed 24% of this year’s activity. “Operating multiple restaurant brands seemed to make good strategic sense in 2011, although buyers didn’t venture far from their core operating style,” said Mr. Epstein. This category included Luby’s acquisition of 23 unit Cheeseburger In Paradise, Darden’s acquisition of Yard House and Ruby Tuesday’s acquisition of Lime fresh Mexican Grill.

What’s the outlook for M&A activity in the chain restaurant industry for 2013? “The biggest challenge to a robust chain restaurant M&A market is the uncertain policy coming out of Washington. Yet to be determined rules on the Affordable Health Care Act could have a chilling effect on restaurant M&A as operators raise prices to cover the increased cost of employee insurance. This all leads to more uncertainty in determining values, which may cause both buyers and sellers to watch from the sidelines in 2013,” said Mr. Epstein.

Since 1989, the Chain Restaurant Merger and Acquisition Census has reported changes of ownership activity for chain restaurants in the United States. Over 2,640 transactions have been captured. In order to be counted in the Census, a meaningful change of ownership must have been announced. The Census does not include routine trades of restaurant securities on a formal exchange, but does include initial public offerings, subsequent stock offerings, significant investments and traditional mergers and acquisitions. Restaurant chains qualify for the Census if either the acquirer or the target is headquartered in the United States and has at least four separate foodservice establishments of the same or different concept. Qualifying candidates include quick service, fast casual, full service, food service management and cafeteria/buffet firms.

The J.H. Chapman Group is an investment banking firm that specializes in mergers and acquisitions in the food and restaurant industries. The firm has offices in Chicago and Paris (www.jhchapman.com).

For a free copy of the 2012 Chain Restaurant Merger & Acquisition Census click HERE.

© 2013 PEPD • Private Equity’s Leading News Magazine • 3-22-13

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