Restaurant chain shoppers have their pick of potential targets, as reports indicate two more concepts are exploring potential sale processes.
This week, the Wall Street Journal said that Jack’s Family Restaurants is exploring a sale process. The company, owned by the private equity firm Onex Partners, is working with North Point Advisors and could have a valuation of $800 million.
Meanwhile, Debtwire reported this week that casual dining operator Restaurants Unlimited has hired bankers to run a sale process. The company previously tried, and failed, to find a buyer but now plans to sell at a smaller valuation because its debt comes due next month.
The sale processes add to the industry’s current shopping list, which includes Perkins & Marie Callender’s as well as the chicken chain Church’s. And activist investors are pushing for the sale of J. Alexander’s and Red Robin Gourmet Burgers. Kona Grill filed for bankruptcy protection and is being sold. One, Whataburger, was taken off that list today.
The restaurant industry has a lot of different companies, including thousands of chains, and so any number of them are for sale at any particular time. And a well-backed buyer could step in and blow away a management team with a massive offer, as Restaurant Brands International did with Popeyes in 2017.
That said, this appears to be an especially active market—even though many of these chains will encounter levels of interest that varies greatly depending on their service style, growth history, and menu.
Growth concepts, particularly limited-service chains, will generate interest because there’s still a sense that the industry is relatively safe from some of the Internet-based problems that have hit other consumer sectors.
At the same time, some of the industry’s secular challenges mean there is little taste for chains that are struggling—namely, weak overall traffic, rising labor costs, the specter of higher commodity costs next year, and external threats like delivery potentially eating away profits. And casual-dining chains are the biggest victims because of their perceived lack of convenience.
There are still buyers for such chains, but they have to have low valuations, and sellers aren’t always willing to take them.
The potential sales of Restaurants Unlimited and Jacks demonstrates that bifurcation.
Jack’s, based in Birmingham, Ala., is a Southern quick-service chain that has enjoyed steady growth in recent years, including system sales growth of 7.1%. The company finished 2018 with 160 locations and system sales of $163 million, according to data from Restaurant Business sister company Technomic.
The Wall Street Journal said that the company generated $80 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) last year. Its CEO is former Burger King executive Todd Bartmess, who had been the CEO of franchisee Heartland Foods.
Former Bojangles’ CEO Clifton Rutledge was named Jack’s chief operating officer last year.
The company’s growth and its earnings history likely will fetch a price beyond what the Journal reported.
Restaurants Unlimited is a different animal. The Seattle-based company operates more than 40 casual and upscale dining locations in nine states, including multi-unit concepts Kincaid’s and Palomino, along with several unique concepts.
The company has grown since the private equity firm Sun Capital bought the company in 2007. The Debtwire report suggests that the company tried for a sale previously, couldn’t get a buyer at its valuation, but is trying again at a lower valuation because its debt is coming due.
Valuation gaps will frequently prevent chains from getting sold—Jack in the Box, for instance, pulled itself off the market as it couldn’t get enough from potential buyers to warrant a sale process, suggesting that public investors in that brand are probably overvaluing the company.
Ultimately, private equity firms and other investors are eager to find the exit and will take steps to encourage a sale process. Perkins & Marie Callender’s, which has been for sale on and off for some time, is now considering a bankruptcy process to ensure that happens.