A year ago, we listed five big restaurant deals we’d like to see in 2020.
We hit on precisely zero.
In fairness, we were half right on two of them. Yum Brands did not buy Wendy’s, but it did buy another burger chain in Habit. And Yum didn’t buy Dunkin’ Brands. Inspire Brands did.
But RBI didn’t buy Subway, CKE didn’t buy Del Taco and Inspire did not buy Papa John’s.
Such a weak track record will not hold us back from taking another bite at the speculative apple for 2021. Mergers and acquisitions are certain to pick up the pace this year, after all, with an entire casual-dining sector at buy-them-now valuations, a public market more receptive to IPOs and a belief that being bigger is better. Maybe we’ll have better luck this time around.
Inspire Brands goes public
We were awfully tempted to double-down on our belief that Inspire should buy Papa John’s. After all, Papa John’s CEO, Rob Lynch, worked with Inspire before taking the gig. Papa John’s is moving to Atlanta, where Inspire is located. And, well, Inspire Brands still doesn’t own a pizza chain.
But Inspire had its opportunity to buy Papa John’s nearly two years ago and passed. Instead, we would like to see Paul Brown’s restaurant chain operator go public. Fast-food companies had a good year in 2020 and Inspire is the type of franchise-heavy business that equity investors salivate over. Also, as this list makes clear with three go-public ideas, this could be a good year to take a chance on the equity markets.
Inspire has a lot of growth potential thanks to Dunkin’s westward expansion and its brands’ international growth. Plus, the company is innovative and has an interesting story to tell. Public investors would likely welcome its arrival.
RBI buys Subway
We will double down on this one. A year ago, we said that Restaurant Brands International, the owner of Burger King, Popeyes and Tim Hortons, should buy Subway, the Milford, Conn.-based sandwich giant. We still think RBI should do this.
Subway isn’t exactly thriving right now. It’s been in decline for years, and likely shrunk again in 2020. But it remains a mammoth, $16 billion global brand that basically prints cash. Its turnaround is as much a marketing issue as anything else—the brand simply hasn’t been the same since Jared Fogle went to prison. While its issues run deeper than that, fixing sales is always the first step.
Oh, and there’s this: Subway recently opened an office in Florida and is now overseen by John Chidsey, who ran Burger King before 3G Capital bought the company, setting the stage for RBI’s formation. And there has long been speculation that Restaurant Brands would be interested in the sandwich giant.
Fast Acquisition buys Raising Cane’s
It’s here where I’ll remind folks this is a ranking of deals I would like to see, not necessarily deals I will see. It’s more of a wish list than a set of predictions.
At least two SPACs, special purpose acquisition companies, are in the market for restaurant chains. And two others could buy restaurant chains. We are agnostic as to which SPAC should buy what, but list Fast here because it was the most specific in terms of targets: Only about 20 or so companies fit its definition—a fast-food chain with a well-known name and an enterprise value of $600 million or more.
Many chains fit this definition, including Five Guys and Qdoba, but the one we’d like to see public is Raising Cane’s, the fast-growing chicken-fingers chain that had as good a pandemic as anyone, at least judging by the long lines at the drive-thru near my house. Cane’s has been one of the fastest-growing brands in the U.S. for years and generates $3 million unit volumes selling chicken fingers.
Someone rescues Steak ‘n Shake
Sardar Biglari took over management of the venerable Steak ‘n Shake in 2009 and rode a strategy of aggressive discounting to several years’ worth of same-store sales growth.
Aggressive discounting ultimately stops working and in recent years the chain has struggled as quality and service declined. The company is using the pandemic to sell stores to operating partners while converting to a counter-service model. But it has just a couple of months to win over potential financiers: Its debt comes due in March.
The best strategy for Steak ‘n Shake at this point is likely through a sale to get it out from under Biglari Holdings. There is a lot to like there—it’s a burger chain with a loyal base of customers and drive-thrus, even though it has traditionally been a full-service concept. Few companies need a change in ownership quite like this one.
First Watch goes public
We expect a lot of activity on the full-service front. Dine Brands has wanted a third brand for some time, but does it have the financing to do it right now? Will someone take Red Robin private? Would Darden buy another chain? And there are many privately held casual diners that will be moved in 2021.
But there are some interesting privately held names that hold our interest that should be made available to public equity investors—notably a generation of breakfast-and-lunch concepts that have performed remarkably well in recent years.
We will nominate First Watch as a candidate to go public, either through an IPO or as a target for one of the restaurant SPACs. The company grew by a third in 2019 and says that it avoided the morning declines of many of its peers. It generates $1.7 million in unit volumes even though it’s closed by mid-afternoon. And we are betting that customers eventually return quite eagerly to full-service restaurants.
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