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OPINIONFinancing

How the Cracker Barrel-Punch Bowl Social deal came together

A December phone call led to an unlikely pairing and one of the most interesting deals in years, says RB’s The Bottom Line.
Photograph courtesy of Punch Bowl Social

The Bottom Line

Robert Thompson, the founder and CEO of Punch Bowl Social, was a guest on the RB podcast "A Deeper Dive" last month and talked in part about the company’s plans for financing. He understandably did not bring up the fact that he was in talks with Cracker Barrel about that very topic.

Not like I’d have believed him anyway. Cracker Barrel? The family dining chain based in Tennessee that’s known for its rocking chairs and knickknack retail shops? Investing in one of the hippest urban concepts in the country?

“We knew it was going to be surprising for folks initially,” Thompson admitted in an interview. “But when people scratch through the first layer of the deal, it’s going to make a lot of sense for the industry.”

Here’s the thing, though. Go back a few decades and Cracker Barrel itself was a trendsetter, an unusual pairing of restaurant and retail shop. It’s similar, in a way, to Punch Bowl’s pairing of restaurant and entertainment. They are hot concepts for different generations, just in very different periods of their life cycles.

To Thompson, that’s where the deal makes sense.

“Cracker Barrel is an iconic brand,” he said. “Punch Bowl talks daily about becoming an iconic brand in its own right.

“Historically, when you think about Cracker Barrel, when they first hit the market, they were putting together this retail and family dining large box that was really outside the box. Punch Bowl Social is today’s version. We’re turning the casual dining industry on its head through experiential food and beverage in a large box.”

But maybe the most surprising element of the partnership is this: It was not Cracker Barrel that came knocking on Thompson’s door.

“I called [Cracker Barrel CEO] Sandy Cochrane, and asked for a meeting,” Thompson said. “She was gracious enough to take one. We hit it off. I reached out to her in December, and in January we had a meeting. And I left that meeting in Tennessee thinking, ‘I may have found my new partner.’”

It would take eight months to get the deal done. For an upstart, high-growth company like Punch Bowl, eight months is an eternity. “It’s like a lifetime,” Thompson said. “We move like lightning speed.”

But it’s notable that eight months is actually quick for a family dining chain, particularly one making an investment when the initial contact was made by a phone call out of the blue from the smaller company’s founder—rather than from an investment banker.

The initial funding will help Punch Bowl build 11 more locations—65% unit growth. After that, Punch Bowl could go to the debt markets. Or Cracker Barrel could provide more equity financing, up to $140 million.

Cracker Barrel also has the right to buy a majority share of the chain or buy the company outright.

The risk, of course, is culture. Established chains have taken stakes or bought outright hot, young growth chains hoping to latch onto the next big thing only to run into cultural problems down the line.

Cracker Barrel, a 50-year-old family dining chain, almost certainly has a very different culture from a concept based in Denver that locates in urban areas and is only seven years old.

Thompson said the companies thought about that risk. “There will be no integration,” he said. “They’re taking board representation. They will have no management role. And frankly both Punch Bowl Social and Cracker Barrel were concerned about the concept as well.

“In our very first conversation we discussed the need to be careful to keep the cultures separate.”

It’s a good deal for Punch Bowl Social. Numerous people called and texted Thompson on Tuesday morning to congratulate him on the investment.

But it’s a risky one for Cracker Barrel. Cochrane has led Cracker Barrel into consistently strong performance since she was named CEO in 2011, and investors have responded—its stock is up more than 300% under her watch.

“Think of how brilliant this deal is for Sandy, to lead the company into doing this kind of deal,” Thompson said. “It takes some forward thinking and frankly a lot of guts.”

And it’s notable that the investment gives Cracker Barrel access to what every chain wants these days: younger consumers. Punch Bowl has lots of them. To Thompson, this sale validates that business.

“It’s another affirmation of the power of millennials to influence an entire multibillion-dollar industry like the restaurant industry,” he said. Cracker Barrel “made a strategic investment in a brand that only exists because millennials demanded it.”

All that said, the investment underscores the oddities of today’s merger and acquisition market.

The lack of growth, shift changes in the way consumers are using restaurants and the influx of delivery and ghost restaurants have added uncertainty into the market for chains.

As such, we have a market where investors are picky, giving sky-high multiples to chains such as Cooper’s Hawk that have alternative business models, while others struggle to find buyers and end up in bankruptcy.

And sometimes, this market can create strange bedfellows.  

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