A flurry of restaurant deals portends to a big 2021

Led by the Inspire-Dunkin’ Brands deal, 2020 turned out to be a bigger year for acquisition activity than anticipated. Expect more of the same this year.
Photo courtesy of Capriotti’s

Capriotti’s, the Las Vegas-based sandwich chain, has been in the market for a second concept for some time and got close on a couple of deals before they fell through.

It certainly wasn’t going to let a little thing such as a pandemic stop that. It’s spent the past six months working to buy Wing Zone, the fast-casual chicken-wing chain, completing the purchase just before the end of the year.

“Fast-casual wings is going to be very competitive,” David Bloom, chief development and operating officer for Capriotti’s and now Wing Zone, said in an interview. “But it was in our wheelhouse from a fit and a business standpoint.

“COVID kind-of maybe sped things up. Wing Zone has continued to perform extremely well during COVID.”

The Capriotti’s-Wing Zone deal was part of an end-of-year flurry of acquisitions, capping off a year that would turn out to be surprisingly robust given the ongoing pandemic and its devastating impact on restaurant sales.

Restaurant chains were involved in more than three dozen deals, according to a Restaurant Business analysis. Another half a dozen large-scale franchisees changed hands, not including the pending purchase of NPC International by Flynn Restaurant Group and a consortium of Wendy’s operators.

The dealflow didn’t just include acquisitions of bankrupt companies and low-priced “opportunistic” deals for restaurant companies struggling during the recession—though there was plenty of that. There were also numerous deals for restaurant companies for high multiples, notably the investment in Zaxby’s by Goldman Sachs and the $11.3 billion monster purchase of Dunkin’ Brands by Inspire Brands.

Much of that came in the second half of 2020, setting the stage for a potentially significant year in restaurant industry mergers and acquisitions, as well-performing chains with drive-thrus and delivery strategies yield high multiples and struggling chains are sold by frustrated owners. Cheap debt thanks to low interest rates, private equity groups and other investors that remain ready to spend, and strategic investors eager to get bigger are all expected to fuel the activity. 

“People are jumping in with real money,” said Mark Wasilefsky, head of the restaurant franchise finance group with TD Bank. “When you look at the activity in 2020, I think it’s going to continue. It’s even going to accelerate.”

“There’s a lot of cash. It’s looking for something to do.” -Mark Wasilefsky.

This year is already shaping up to be an active one on the restaurant deal market. On Friday, the special purpose acquisition company Tastemaker Acquisition Corp. priced its higher-than-expected offering, seeking to raise $240 million with which it can buy a restaurant chain.

That was $40 million more than expected. “Covid’s if not [a] once in a lifetime a once-in-a-long-time opportunity, the last time since like 08-09 where you get to see who’s swimming naked,” Andy Pforzheimer, co-CEO of Tastemaker, said in an interview. “It isn’t necessarily about financial stability. It’s about management nimbleness, which ideas will work five years from now, who thought to adopt technology in time.”

Tastemaker is one of as many as four SPACs—publicly traded shell companies that use funds from equity investors to make an acquisition—that could be looking at restaurants. They include Fast Acquisition Corp., which is targeting a fast-food company in particular, and Starboard Value, the Papa John’s investor whose SPAC features former Dunkin’ Brands chairman Nigel Travis.

But many other types of investors could target restaurants, too, including private-equity groups and strategic buyers, as well as more non-traditional types of acquirers that have eyed the industry in recent months. For instance, a vendor acquired Red Lobster last year.

“There’s a lot of cash,” Wasilefsky said. “It’s looking for something to do.”

Opportunistic deals could reasonably be expected to proliferate throughout 2021—many chains remain financially damaged by the past several months. A weaker-than-expected recovery could push more of them into bankruptcy or a fire sale process.

One of the biggest is on the verge of completion. NPC International, the second-largest franchisee in the U.S. and one of the biggest restaurant operators of any type in the U.S., declared bankruptcy last year. Just this week, it reached a deal with the largest franchisee, Flynn Restaurant Group, as well as Wendy’s. Flynn will acquire 925 Pizza Hut restaurants and close to 200 Wendy’s units for $550 million. Five Wendy’s operators will purchase nearly 200 locations NPC operates for $250 million.

Yet many expect there to be opportunities throughout the industry. And while some investors—notably onetime big industry investor Sun Capital Partners—are exiting the business, many others are stepping in.

“There are companies out there that have increased their EBITDA with 20% lower sales. Wouldn't you like to bet on those coming out of this?” -Andy Pforzheimer.

Wasilefsky noted that the business has shifted so much that it could provide opportunities for investors to make quicker returns—which could lure more types of buyers than there had been before.

Specifically, he noted the proliferation of third-party delivery, virtual brands and ghost kitchens all make it easier and less capital intensive to ramp up development of a concept. The huge popularity of the Popeyes Chicken Sandwich in 2019—brought on entirely by social media—also opened up opportunities to market a product quickly, which could fuel the growth of such concepts.

“It’s tough to make money in the short-term in the restaurant business,” Wasilefsky said. “You’re not going to make a 30% return in three years. It takes time and it takes money.”

But, he said, “What I think we’re seeing, as far as the biggest investors, the Goldman Sachs of the world, why are they getting into this business? It’s the confluence of digital technology, delivery, ghost kitchens. It’s an asset-light model even more so than before. They seek to leverage those. If ghost kitchens take off, it provides a different type of investment model.”

In addition, companies have spent the past several months learning to operate. Many casual-dining chains, for instance, learned how to effectively do takeout. They developed new virtual brands—It’s Just Wings, the Brinker International virtual wing brand, became a $100 million concept almost overnight, for instance.

Many brands also learned how to do more with less. “People are innovating in each segment,” Pforzheimer said. “There are companies out there … that have increased their EBITDA with 20% lower sales. Wouldn’t you like to bet on those coming out of this?”

As for Capriotti’s, it likely won’t look at another acquisition “in the short term.” But the company opted to make its deal for another acquisition-related reason: The company has had interest from investors over the years but didn’t think its single-concept model was the right vehicle. Buying Wing Zone, in other words, makes the company more investable.

“Large investment groups wanted to invest in Capriotti’s for years,” Bloom said. “We didn’t have the right vehicle for them to do that, that made a tremendous amount of sense from a business standpoint.”

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