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Financing

Big Burger King franchisee Carrols makes its first post-pandemic deal

The operator has acquired 19 restaurants in Indiana and Michigan after taking a break to pay down debt and deal with the impact of the coronavirus.
Photo courtesy of Burger King

On Thursday, the big Burger King franchisee Carrols Restaurant Group said that it had acquired 19 restaurants in Indiana and Michigan.

It’s not a big deal, not for a company with more than 1,000 such restaurants throughout the eastern U.S. But it’s the first acquisition for Carrols in more than two years, an eternity for what has been one of the most acquisitive franchisees in the country.

With debt levels down, CEO Dan Accordino said in a statement, “we have been pursuing opportunistic bolt-on transactions to grow our overall portfolio.”

Carrols in the 1960s and early 1970s operated a chain of restaurants by that name before it started converting them to Burger King locations starting in 1975. In 2012 it operated just less than 300 Burger King locations and owned the Pollo Tropical and Taco Cabana brands. It spun those two off into Fiesta Restaurant Group and began buying Burger Kings, first by acquiring 278 locations from the brand itself.

Along with that deal it acquired the right to buy any Burger King location put up for sale in 19 states—even if they’d agreed to sell to someone else—a move that would help the franchisee acquire hundreds of locations. By 2019 it operated more than 1,000 Burger King locations and had the right to buy another 500. It also operated 55 Popeyes locations.

The company generated a reputation for improving sales and profitability at the restaurants it acquires. But all of those deals required debt.

In 2018, according to the financial services site Sentieo, Carrols had a debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of less than 3x. After the company made one of its biggest deals, a merger with another franchisee Cambridge in 2019, that ratio soared to 4.3x.

Among the issues that were causing Carrols problems: Discounts pushed by its franchisor. Executives told investors in 2019 that discounts in the third quarter that year alone reduced adjusted EBITDA by $7.3 million.

Early last year the company opted to pause the pace of acquisitions and spending on remodels so it could improve efficiencies, generate more cash flow and pay down debt. And it gave up its unique right of first refusal to buy other franchises. This was all before the pandemic.

In May, however, company executives said they largely accomplished their goal—they said that their leverage ratio declined to 3.4x. And, Accordino reminded investors according to a Sentieo transcript, “we are still approved to acquire up to 500 Burger King restaurants in territories where we currently operate and are pursing a number of acquisition opportunities at the moment.”

The 19 restaurants acquired came in a pair of deals. The acquisitions give the company a bigger presence in two states where it already operates a lot of restaurants. “Importantly,” Accordino said, “we believe that we can improve upon the average sales volume of these restaurants and increase their margins over time as we integrate them into our existing operations.”

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