Restaurant Brands International (RBI) abused its control of Carrols Restaurant Group to force the franchisee to sell its business for $1 billion, according to a lawsuit filed in a Delaware Court.
The lawsuit, filed by a pension fund and a trio of shareholders, argue that the owner of Burger King effectively coerced Carrols, its largest franchisee, by using its status as the franchisor and a major shareholder to limit the company’s growth prospects.
Carrols “stockholders reasonably believed that they faced the Hobson’s choice of either (a) supporting the unfair transaction with RBI or (b) voting down the transaction and owning shares of a company with limited growth prospects,” the lawsuit says. “Thus, Carrols’ stockholders were coerced into voting in favor of the transaction.”
The lawsuit illustrates some of the complexities of the sale and of the challenge that Carrols faced at the time, despite its otherwise strong performance leading up to the deal. The deal, according to the lawsuit, was negotiated over just four days.
RBI, which also owns Popeyes, Tim Hortons and Firehouse Subs, had an unusual relationship with Carrols dating back to its 2014 investment in the franchisee, which operated about 1,000 locations. Carrols was publicly traded, and RBI owned 14.6% of the company’s stock.
Carrols grew largely through acquisitions for years until Burger King’s sales and profit problems forced it to slow down and focus on profitability. One of its acquisitions was in 2019, when Carrols bought Cambridge Franchise Holdings, owned by the investment firm Garnett Station Partners, or GSP.
As part of that deal, GSP owned 16.7% of Carrols stock. GSP’s principals, Matt Perelman and Alex Sloane, were on the Carrols board.
Carrols had the best performing restaurant company stock on Wall Street in 2023 thanks to strongly improving cash flow as Burger King’s sales improved and the operator improved its cost structure. GSP was starting the process of exiting that investment by selling its stock.
The lawsuit argues that Carrols was planning to get back into the business of acquisitions. Specifically, the complaint refers to a comment from then-CEO Deb Derby in August, noting that “I believe that obviously you’ll see acquisitions as a component” of the company’s three-year strategy going forward.
Yet RBI wanted Carrols and other franchisees to focus more of their capital spending on remodels and not acquisitions. According to the lawsuit, RBI told Carrols that remodels should be the company’s priority.
Carrols considered whether to explore a sale last year, according to the lawsuit. But it ultimately backed off, deciding that there would likely be few, if any, buyers given the company’s substantial remodel requirements, according to the lawsuit.
We might add that remodel requirements can depress the price franchisees can fetch in a sale. Complicating matters for a company the size of Carrols is that there are relatively few buyers out there interested in acquiring large numbers of restaurants.
What’s more, Burger King has shifted to a strategy of smaller operators, and Carrols’ massive size stood out amid that strategy.
RBI in December did decide to make a push to buy Carrols and met with Perelman and Sloane in the process, according to the lawsuit. The two directors ended up on the special committee examining whether Carrols should be sold. The lawsuit argues that was a conflict of interest given their relationship with RBI and GSP’s plan to exit its investment in the company.
RBI initially offered $8.75 per share for Carrols on Jan. 11, according to the lawsuit, which was 6% higher than the company’s closing price the day before. The lawsuit noted that Wall Street analysts’ target price for the operator was $13 per share.
The committee—and Carrols board—ultimately agreed to a $9.55-per-share purchase price, in part because RBI was unlikely to allow the company to buy more restaurants. The board agreed to the deal on Jan. 15, four days later. The deal was announced the next day. Shareholders approved the deal, which was finalized in May.
Representatives for RBI have not responded to requests for comment.
RBI does not plan to keep Carrols’ restaurants for long. Burger King is operating them as company stores and plans to spend to remodel the restaurants quickly. It will then resell those restaurants in groups of 50 or so.
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