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Restaurant deals make a comeback, sort of

Even facing a winter of additional shutdowns and a potential double-dip recession, investors are betting on restaurants. But only certain sectors, says RB’s The Bottom Line.
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The Bottom Line

Zaxby’s picked the right time to bring on an investor.

The market for chicken is hot right now and a lot of investors are eager for a piece. But it is also a drive-thru-centric concept at a time when the drive-thru is just about the only thing going for the restaurant business at the moment.

Not surprisingly, Zaxby’s received a lot of interest before it settled on an investment from Goldman Sachs’ private equity arm. “There hasn’t been a lot of transactions this year, period, in the industry,” CEO Zach McLeroy said in an episode of the Restaurant Business podcast “A Deeper Dive” set to broadcast on Wednesday. “It was great timing for us.”

But deals are coming quickly now. In just the past two months, Inspire Brands proposed to buy Dunkin’ Brands in an $11.3 billion deal; Torchy’s Tacos received funding from a handful of investors; the growth concept Everytable received $16 million from a consortium of investors; Topgolf was sold to the golf equipment company Callaway and, by the way, NPC International has interest from close to 60 different companies.

One could look at these deals and conclude that the market for mergers and acquisitions in the restaurant space has returned with a vengeance. In just those above examples there are a couple of investments in growth concepts, another one with a more mature growth chain taking on a major investor for the first time, an unusual deal involving a unique company, the biggest deal in the industry in six years and a classic feeding frenzy.

In theory, then, investors are jumping back on the restaurant bandwagon, projecting a future recovery.

But that is only partially true.

All but one of those brands mentioned above are limited-service concepts demonstrating a true recovery. The other, Topgolf, is being sold to a major investor in a rather unique deal.

Investors—and, notably, the bankers supporting their deals—are simply following customers. Those customers are flocking to concepts with a healthy dose of takeout, especially drive-thrus and delivery-friendly menus. And they are shying away from full-service concepts and urban-centric chains.

The market for limited-service restaurants has largely returned. The aforementioned Dunkin’ Brands has fully recovered from its pandemic problems, enough to earn a take-private deal at a multiple of 18 times 2019 earnings.

The rest of the market is largely non-existent. Concepts in struggling markets that don’t need to find an investor have hunkered down, either hoping to survive or just waiting until conditions improve to make a deal. Those that have to make a deal are either doing so out of bankruptcy court or they’re being sold at giveaway prices to bargain-hunting investors.

In reality, it’s not terribly different than it was before the pandemic, when investors flocked to winners and avoided losers like the plague. The difference now is simply more extreme, where life is normalized for the winners while the losers end up in the hands of lenders.

It’s all just another example of the pandemic picking winners and losers.

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