Financing

Private equity bows out of restaurant chain dealmaking

The year in acquisitions: Strategic deals dominated a weak year for industry mergers and acquisitions. Investment firms remained on the sidelines.
restaurant mergers and acquisitions
Butterfly Equity's purchase of Qdoba was one of the few big private equity deals in 2022. / Photograph: Shutterstock.

The year’s most unusual deal came in August. Butterfly Equity, the Los Angeles-based private equity firm, acquired the fast-casual chain Qdoba, with plans to merge it with the much smaller Modern Restaurant Concepts, operator of Modern Market and Lemonade.

That itself was unusual. But what made it strange, at least in 2022, was that it was a private equity deal.

Investment firms were not just on the sidelines of the restaurant deal game in 2022, they were almost out of the stadium entirely. The investment firms were behind relatively few deals for substantial chains this year. There was the Qdoba deal and an earlier acquisition for Captain D’s by Centre Point Partners. In addition, Blackrock pumped $150 million into Puttshack. For the most part, private equity firms kept their deals small or they ignored restaurants altogether.

The lack of private equity firms involved in major dealmaking highlighted what was an odd year for mergers and acquisitions. There were few big deals in the industry last year. A generation of publicly traded shell companies all came up empty. The IPO market was frozen. And sellers turned to unusual buyers to get rid of restaurant chains, including franchisees, a consulting group, the former owner of an NBA team and even a YouTube star.

Here’s RB’s look at the year in restaurant acquisitions.

A slow year for acquisitions

Private equity firms have traditionally been aggressive buyers of restaurants. They invest in growth chains, buy mid-sized concepts and hope to grow them and take them public, buy concepts out of bankruptcy and acquire brands to suck the life out of them. That has historically driven a lot of mergers and acquisitions.

But the lack of private equity involvement led to a notable decline in restaurant chain M&A. There were only 30 deals involving restaurant chains and most of them were small. That was down from 41 deals the year before—when private equity activity was also below normal. The counts do not include franchisees, which are difficult to track. Yet there were fewer of those deals, too.

The reason for the lack of deals is simple: Buyers and sellers simply could not agree on a price. Valuations that were sky-high in 2021 fell in 2022 as the stock market plunged, interest rates soared and earnings declined thanks to inflation.

Thus, sellers wanted buyers to price like they did in 2021 when the industry’s valuations were at their peak. But buyers were suddenly unwilling to give them those sorts of prices. “Generally the bid and ask have been so far off it’s been tough to do deals,” said Jim Balis, head of the strategic operations group for CapitalSpring. “Sellers are selling off 2021, while we’re looking at the last two weeks.”

The market tanks

Five restaurant chains went public in 2021 and eight more lined up for their IPOs as valuations hit record levels.

Inflation concerns caused the U.S. Federal Reserve to raise interest rates, igniting fears of a recession, and all that went for naught. All of the companies believed to be considering an IPO at the beginning of 2022—including Panera Brands, MOD Pizza and Fogo de Chao—are still privately-held companies as of the end of 2022.

Meanwhile, plunging valuations for publicly traded companies contributed to the belief that privately-held restaurants were worth less than they were in 2021, at least among buyers. So the sellers’ market that existed a year ago largely dissipated. It also had a direct influence on a specific class of buyers.

So much for SPACs

In 2020 and early 2021, several former industry executives jumped on the SPAC bandwagon. Special purpose acquisition companies, or publicly traded shell companies that use money from public investors and use it to make an acquisition, were all the rage.

But a tanking market didn’t exactly prove alluring for potential targets, while valuations concerns also kept deals from taking place. None of the SPACs that were considering restaurants completed a deal, as of this writing. That includes Danny Meyer’s SPAC, USHG Acquisition, which was going to play a role in the Panera Brands IPO. A deal between Fast Acquisition and Landry’s likewise fell through.

Fewer bankruptcies

One other point that has kept buyers out: A lack of bankruptcies. Only three notable restaurant chains last year sought debt protection, including Happy Joe’s Pizza and Bertucci’s. Yet that was also a subject of a lack of much of an M&A market. With few potential buyers, lenders were less likely to force companies into bankruptcy even if they’d fallen behind on debt.

But companies that made it through the pandemic were in better financial shape, meaning fewer companies were close to that point. Regardless, bankruptcy is usually a source of acquisitions and the lack of such moves kept dealflow light.

Fuzzy's Taco Shop

Dine Brands Global agreed to buy its third brand this year, Fuzzy's Taco Shop. / Photo courtesy of Fuzzy's Taco Shop.

Strategics take over

After we spent so long talking about what didn’t happen in the acquisition markets, let’s talk about what did: strategic deals.

While previous eager buyer Fat Brands took a break from dealmaking in 2022, largely swallowing the $900 million worth of deals it completed in 2021, Canadian brand operator MTY Food Group made a pair of deals: paying $200 million for Famous Dave’s owner BBQ Holdings and $207 million for Wetzel’s Pretzels.

Two full-service brand operators made deals for smaller chains. Denny’s changed management and then bought the 52-unit breakfast-and-lunch chain Keke’s Breakfast Café. And Dine Brands, the owner of IHOP and Applebee’s that has been talking about a third brand since roughly forever, finally pulled the trigger with an $80 million deal for Fuzzy’s Taco Shop.

Gala Corp., an owner an investor in Cici’s Pizza and Mooyah Burgers, made two deals, for Dunn Brothers Coffee and then for Rusty Taco.

The year’s biggest deal, however, belonged to an eatertainment company, Dave & Buster’s, which paid $835 million for the family-focused food-and-games chain Main Event.

Other buyers pop up

So, with the public markets out and private equity groups on the sidelines, who was left to buy what was available?

Well, in 2022 there were all kinds of buyers. Larry Miller, former owner of the Utah Jazz, bought the drive-thru “dirty soda” chain Swig. John Elway, yes that John Elway, invested in Tom’s Watch Bar. Executive Decisions Group, a franchise consulting firm, acquired The Lost Cajun. Franchisees did plenty of buying, such as the acquisition of Nick the Greek by Jack in the Box’s largest operator, or the deal for Snappy Tomato Pizza by its largest franchisee.

Then there’s the frozen yogurt chain 16 Handles, which was acquired by a group featuring the YouTuber Danny Duncan.

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