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A Dunkin’ Brands sale would be really expensive

Investors have speculated that JAB would buy the company, but it would likely require a record price, says RB’s The Bottom Line.
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The Bottom Line

JAB Holding Co. would have to break the bank to get Dunkin’ Brands.

Speculation that the investment firm would buy the coffee chain has increased over the past week, following Coca-Cola’s proposed acquisition of Costa Coffee.

Theoretically, the owner of Panera Bread and just about every other coffee chain not named Starbucks or Tim Hortons would buy Dunkin’ in a bid to solidify its own position in the space. That makes all sorts of sense.

But a Dunkin’ takeout would not be cheap. Not by a long shot. In fact, it would probably take a price that by one measure bests anything else we’ve seen in the restaurant space.

Dunkin’ stock has been on a nice run of late. Entering trading Thursday, it’s up 20% this year and nearly 50% over the past 12 months as investors have bought into Dunkin’ Donuts’ menu simplification, store design and other revitalization efforts.

But that’s also increased the price of any takeout.

Dunkin’ currently has a market cap of $6.3 billion and an enterprise value of just over $9 billion.

From a valuation standpoint, however, Dunkin’ has an enterprise value multiple of nearly 19 times earnings before interest, taxes, depreciation and amortization, or EBITDA.

JAB would have to pay a premium over that multiple. For instance, a 25% multiple over the opening share price would give Dunkin’ an enterprise value multiple of around 21 times EBITDA.

More than likely, JAB would have to give investors an even bigger premium than that, given Dunkin’s strength over the past year and the perception that it still has a lot of growth to come both in the U.S. and internationally.

To be sure, JAB is not afraid of large multiples. It paid a multiple of nearly 22 for Peet’s Coffee in 2012 when it first emerged as a player in the beverage business. It paid a multiple of about 17 for Panera Bread.

And 3G Capital-backed Restaurant Brands International paid a 20-plus multiple for Popeyes Louisiana Kitchen last year.

I’d bet that JAB would have to best any of those multiples to get Dunkin’ Brands to sell. And to be honest, I'm not really sure the company would sell, anyway.

These types of multiples have historically been considered ridiculous for anything in the restaurant business, where valuations have traditionally ranged from 5 times or less to 15 times EBITDA.

To be sure, such benchmarks have gone out the window as investors with long-term timelines and a seemingly unlimited pile of cash have bid up prices for well-established brands that nevertheless have growth still in them.

And that makes sense. In 2010, 3G had little experience in the restaurant space and was mocked for paying a multiple of 8 for Burger King. It has made boatloads of money off that investment, proving that traditional notions of industry valuations were misguided.

It’s here where I remind folks that multiples are typically all over the map, and calculations of the earnings multiple vary from buyer to seller or from one analyst to the other. Suffice it to say it’s a pathetic measurement of purchase prices, but it’s what we have to work with.

On top of that, the most important number for any buyer is the total price. If JAB can afford to pay $11 billion for an asset-light, franchised brand with a well-known name, loyal customer base in its home markets and plenty of room to grow, who cares in the end what the multiple will be?

Buyers such as JAB can pay high prices because they don’t intend to sell the company in a few years and so they don’t need to make a profit off of a resale down the line. They just need something that will provide their investors with a source of cash down the line.

All that said, it would continue to reset a market for restaurant acquisitions that has skyrocketed in recent years, potentially giving sellers grand notions of how much their businesses are worth. But there aren’t a lot of companies out there like Dunkin’.

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