Restaurant investors are thinking big these days.
Over the past two years, private-equity investors, strategic buyers and family offices have all conspired to fuel the most active period for restaurant industry mergers and acquisitions in years.
There were more than 70 deals for restaurant brands over the past two years, according to a Restaurant Business analysis of acquisition activity. That included 37 deals that were completed in 2018 and 38 in 2017.
By comparison, there were just 29 deals in 2015 and 2016 combined.
Source: Technomic and Restaurant Business data
The deal flow over the past two years is expected to continue into 2019. Among publicly traded chains alone, at least four companies are currently interviewing buyers, based on company reports and RB sources.
“There’s been a flurry of deals, particularly in the back half of this year,” said Jacob DuBois, managing partner with Laguna Beach, Calif.-based Eagle Pointe Capital, a midmarket advisory company. He said he is working on a couple of deals and just signed up for another.
Fewer growth investments
The deal flow last year also represents something of a shift in the way investors are eyeing the restaurant industry.
Between 2012 and 2018, private-equity groups and even a few restaurant chains were willing to put big dollars into growth chains. But there were only six minority investments into small growth chains with 15 or fewer units last year, according to an RB analysis.
That’s down from 19 in 2016.
That doesn’t necessarily mean that there isn’t still strong interest in such chains from investors. “Maybe it has slowed a little bit,” said Jeff Brock, managing partner with private-equity firm Hargett Hunter, which, along with investment firm TriSpan, acquired full-service chain Stacked. It also invested another $2.7 million into its Bellagreen concept.
But “as we’re talking to entrepreneurs, they still feel comfortable with the amount of capital available,” Brock said. “If you just want capital, you can find it.”
Larger private-equity firms were a surprising presence in the market for smaller, growth-chain investments, which helped drive a lot of the investment activity for years.
But Brock said many of those larger investors were targeting “unicorns” that had strong unit volumes and unique propositions. “It just played itself out in just a few deals,” he said. Those investors have since backed off and concentrated their attention where it’s traditionally been: the buyout market.
And that market has been active.
Strategic buyers take over
A microcosm of that shift might be Inspire Brands, owned by Atlanta-based private-equity firm Roark Capital.
Roark has been a frequent buyer of restaurant brands for years, but slowed down as prices for chains were inflated in 2014 and 2015.
The latter year, Roark invested in fast-casual chain Naf Naf Grill in what remains a rarity for the firm—taking a chance on an upstart chain, rather than a more established concept.
In 2017, however, Roark-backed Arby’s made a play for Buffalo Wild Wings, and the combination led to the creation of Inspire, which last year acquired Sonic Corp. and promises to buy additional chains.
Roark-owned multibrand operator Focus Brands, meanwhile, took private juice chain Jamba Juice.
Inspire joined some other big buyers of chains, including JAB Holding Co., which has been acquiring chains at a breakneck pace in recent years and which bought British bakery-cafe chain Pret A Manger last year. JAB-owned Krispy Kreme, meanwhile, bought cookie chain Insomnia Cookies.
Then there’s 3G Capital-backed Restaurant Brands International, which was quiet in 2018 after swallowing Popeyes Louisiana Kitchen, which it bought in 2017. Its big appetite makes it a potential buyer for just about any restaurant chain in the U.S.
Other big buyers have signaled a willingness to explore the market, too. Darden Restaurants in 2017 acquired Cheddar’s Scratch Kitchen and could always buy something else. Applebee’s owner Dine Brands Global has signaled it wants to buy a third brand. And Yum Brands, owner of KFC, Pizza Hut and Taco Bell, has said it would consider a fourth concept.
In other words, the buying isn’t done.
At least part of the reason for such active dealmaking has been growth worries. A largely saturated U.S. market has made it harder for chains to add units or generate easy same-store sales increases.
So adding additional chains makes more sense. “People are just buying growth,” DuBois said.
That’s especially true in what was quietly the biggest M&A trend of 2018: the willingness of buyers to cobble together struggling chains under a single operator.
The most notable such deal was Romano's Macaroni Grill’s purchase of Sullivan’s Steakhouse last year—just a year after the former chain emerged from bankruptcy protection.
But there are other such stories: Elite Restaurant Group acquired Daphne’s, Patxi’s Pizza and then Noon Mediterranean. High Bluff Capital bought Quiznos and Taco Del Mar. Arc Group bought Fat Patty’s and then Tilted Kilt. Shari’s Cafe & Pies quietly bought Coco’s and Carrows.
Such chains can be had for relatively low prices. In addition, a difficult sales environment and rising labor and real estate costs are all hurting margins, and such chains find it easier to make profits when operating multiple concepts.
“Restaurants have been attacked from all sides—labor, real estate,” DuBois said. “It’s hurting margins, big time.”