How to get a restaurant chain at a discount price

Want a restaurant chain? Find a company selling a secondary concept, says RB's The Bottom Line.

The Bottom Line

Want to buy a restaurant chain but aren’t made of money? Find a publicly traded company looking to offload a secondary concept to ease investor pressure on management.

The latest example came late last year, when Jack in the Box opted to sell Qdoba to Apollo Capital Management for $305 million.

To be sure, $305 million is hardly chump change. And Qdoba has struggled periodically under Jack in the Box, operating with lower unit volumes than its primary rival, Chipotle Mexican Grill—even after the latter chain’s unit volumes plunged 23% in 2016.

But the half-company-owned Qdoba was sold for a multiple that was likely between 3 and 5 times earnings before interest, taxes, depreciation and amortization, based on conversations with various sources. At a time when limited-service chains are fetching otherworldly multiples, that kind of low price stands out.

By comparison, Darden paid $780 million for Cheddar’s—which, though it was almost all company-run, is still a casual-dining chain. The two chains have similar system sales.

As we said in December, however, Jack in the Box had little choice. Activist investors have been sniffing around the company in recent months. And since the deal was announced, Jana Partners revealed an activist stake in the company.

But Jack in the Box is hardly alone in offloading smaller concepts on the cheap. Consider this:

In 2016, the struggling Ruby Tuesday sold off the assets of its own fast-casual Mexican brand, Lime Fresh, in separate deals totaling $10.6 million. It had paid $24 million for the chain.

In 2015, Bloomin’ Brands sold Roy’s Restaurants for $10 million. Roy’s is considerably smaller than Qdoba, with just 20 locations, but that still amounts to a low $500,000 per unit for an upscale-casual concept.

That same year, Ignite Restaurant Group, desperate to improve its finances, sold its disastrous Italian chain Macaroni Grill for a meager $8 million less than two years after buying the chain for $55 million, believing it was too good a deal to pass up.

Alas, not even a stupid low valuation would keep Mac Grill from filing for bankruptcy two years later, the same year its former parent company went into debt protection.

This isn’t a new thing. In 2006, Wendy’s sold Baja Fresh for $31 million. It had paid $275 million in 2002.

In 2013, Bob Evans Farms sold the underperforming Mimi’s Cafe for $20 million in cash. Bob Evans paid $182 million for the brand in 2004.

That said, there are other examples of successful spinoffs for higher prices. McDonald’s spun off Chipotle in an IPO in 2006, which came right after Wendy’s spun off Tim Hortons in its own IPO.

And not every sale is cheap. Darden, under pressure from investors, sold Red Lobster for $2.1 billion in 2013 to Golden Gate Capital.

Still, in many cases, chains get sold at low prices because the company believes it would be better off without it, so they can concentrate on existing holdings.

And in many cases, the brands being sold are hopeful that new management will be able to concentrate on their needs.

That’s certainly the hope at Qdoba, where many franchisees seemed to welcome the sale to Apollo, believing that some singular focus could help the chain realize its potential.

Of course, history has not been kind in many of these situations—most of the chains mentioned above struggled further after their sales, as the Mac Grill bankruptcy attests. There’s often a reason chains get sold so cheaply.

But Qdoba has performed much better than any of those chains more recently, and as we said initially, the total price is comparatively large. There’s little reason to think that Apollo won’t work to grow the brand and get a return on its investment.

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