Restaurant chains may not be getting as much business as they like these days but it doesn’t appear to be scaring away potential buyers, at least based on some of the news we’re seeing this week.
First, a pair of private-equity firms have apparently made an offer for the pizza chain Papa Johns at $60 per share, taking the brand private. Multiple reports say that Apollo Global Management and Irth Capital Management have made the offer. Papa Johns would not comment on the reports.
Second, the Wall Street Journal reported this week that the Charlotte-based chicken chain Bojangles is talking with investment bankers on a potential sale that “could fetch more than $1.5 billion.”
The report suggested that the brand is eager to explore a market “craving restaurant and chicken companies.” Dave’s Hot Chicken, after all, was just sold for $1 billion.
Buyers do appear to be “craving restaurant” companies right now, but those cravings remain mostly restricted to franchise restaurants. Both Bojangles and Papa Johns are predominantly franchised brands, though both do operate plenty of their own restaurants that buyers might want to sell off to help fund any such deals.
There have been a number of deals this year, notably the Dave’s Hot Chicken sale. Several others are potentially on the table, notably the chicken chain El Pollo Loco. They come after some major deals for brands in recent years that appear to be establishing strong valuations, including Tropical Smoothie Café for $2 billion and Jersey Mike’s for $8 billion, both to Blackstone.
But the bulk of these have been for franchised brands, which generally hold strong valuations even in weaker markets such as this. Because they get most of their revenues and profits from royalties, rather than actual restaurant sales, they tend to be more recession-resistant.
And the buyers may be trying to take advantage of weak valuations to make long-term bets on brands, which is clearly the case with the potential Papa Johns deal.
Papa Johns stock has been buoyed by recent reports of potential buyer interest but its valuation has been down compared to historical levels. Pizza chains have lost delivery business to third-party aggregators, which has put pressure on sales.
The chain itself has been making major changes under CEO Todd Penegor, focusing more on pizza and improving operations and technology. But it also has plenty of room for growth, both in the U.S. and internationally, which could make it an attractive target.
Bojangles is a bit more of a complex case.
Yes, chicken is “hot” right now. But that hotness isn’t quite that widespread.
The bulk of the sales growth in the chicken business has been in hand-held chicken such as what Dave’s or Raising Cane’s sells—fast-casual chicken chain sales grew 24% last year.
But fast-food chicken sales grew less than 4% last year, and that’s worse when factoring out sector leader Chick-fil-A. While many of these brands may have been hurt by recent economic challenges, consumers have shown a strong preference for handheld chicken for years.
But Bojangles has generally outperformed its competitors. Its sales grew 5.6% last year. And its sales growth over the past five years has averaged 7.2% per year. By comparison, Church’s Texas Chicken has averaged a 0.8% decline. KFC 1.5%. Only Popeyes among major bone-in chicken chains, at 8.5%, has performed better.
Either way, it seems, the market for restaurant chains is strong right now, and some companies are willing to test it.