The biggest deal in the restaurant industry in six years began with a conversation over dinner.
On July 13, Inspire Brands CEO Paul Brown met with Dave Hoffmann, CEO of Dunkin’ Brands, over dinner in Boston, near Dunkin’s Canton, Mass. headquarters.
The two had multiple conversations since January, when Brown, Hoffmann and former Dunkin’ CEO Jon Luther—an Inspire board member—first met to discuss a potential partnership on technology initiatives. After COVID hit, the conversations shifted to the business impact of the pandemic.
But it was at that July meeting that these conversations turned into something a bit more serious. According to federal securities filings, Brown said the Atlanta-based Inspire would be interested in buying Dunkin’ for a price in the “high 70s.” That day, Dunkin’ Brands’ closing price was $64.58 per share.
Inspire would ultimately pay a lot more than that.
The filing reveals some of the inner workings of such merger deals, which typically involve months of discussions following seemingly innocent conversations.
Dunkin’ has long been speculated as a potential takeover target, viewed as the most acquirable of the largest restaurant chains in the U.S. and one with legitimate growth potential domestically. Inspire’s interest, at a point when its stock was still trading at a relatively low level, reveals the opportunism some investors saw during the pandemic.
Yet, because of Dunkin’s growth potential, Inspire still needed to pay a significant premium big enough to convince the board and shareholders to sell, rather than keep their stock and ride the increase over time. Dunkin’s board was clearly not going to be moved by a high-70s price, not at a time when things were looking up.
Besides, the company’s stock had been trading in the high-70s in January and had been climbing in the previous weeks as its sales recovered and investors grew bullish. The board’s decision to wait proved beneficial.
Indeed, the stock would go up another 37% before the two companies would agree on a deal. The $106.50 per share that Inspire is paying is 65% higher than it was the day of that dinner. That’s real money, costing Inspire approximately $2.5 billion more to acquire Dunkin’.
The sides went back and forth over the subsequent months on a proposed merger, with Dunkin’ pushing for a price as high as $110 per share at one point before the sides ultimately agreed on a price of $106.50 per share—valuing the deal at $11.3 billion.
That deal is worth about 24 times estimated 2020 earnings before interest, taxes, depreciation and amortization, or EBITDA. But a far better comparison is probably 2019 numbers—about 18x, based on estimates from financial services site Sentieo. That’s still a substantial valuation, one indicative of Dunkin’s potential value.
The agreement also includes a “no-solicitation” agreement, meaning that Dunkin’ cannot go solicit other offers—though it can certainly look at another offer if it is presented, according to securities filings.
In the end, the deal will create one of the largest restaurant companies in the U.S., one that operates brands in several different sectors and has a lot of room to grow. But Inspire is paying a steep price to get it.