It didn’t take long for Jeff Crivello to get back into the business of buying restaurants after the company he once led, Famous Dave’s, was sold to the Canadian company MTY Group. He formed Ciao Hospitality Group and acquired concepts like the bar-and-grill chain Cowboy Jack’s. He is also eyeing both BurgerFi and Rubio’s and eyed other deals.
“We’re always buyers,” Crivello said in an interview. “Human behavior will never change. People will always want to get out of the house.” And that’s good for restaurants, even if the industry is in a bit of a traffic slump currently.
The market for restaurant mergers and acquisitions, or M&A, is a matter of perspective right now.
For the most part, that market is slow, at least for traditional deals. Yes, some good deals are getting done, particularly on the franchise side, but a lot of traditional buyers just aren’t buying right now.
This would seem to be the wrong time, then, for a string of bankruptcies, falling industry traffic, a burgeoning value war likely to eat into profit margins and growing concern over the state of the business.
Yet that has provided an opening for a new string of buyers looking for restaurant chains in the bargain bin, as a growing number of platform companies or opportunistic buyers seek to acquire struggling brands on the cheap.
That has created something of a bifurcated market: Deals on the high end are getting done. Deals on the low end are getting done. Others? Probably not.
“I think the reality is a lot of traditional private-equity firms that were active in the market are less active than they were,” said Josh Benn, head of corporate finance with the investment banker Kroll. “But there has been a proliferation of new capital sources, whether they be family offices or other private-equity backed strategic platforms that are actually quite active.
“And I would tell you that the market is quite bifurcated.”
Market dynamics
To understand the M&A market right now, go back to 2021. The quick recovery of sales after the pandemic led to a flood of money into restaurant chains, sending multiples skyrocketing to unreal levels.
But inflation thinned margins. And with interest rates rising, the result was a reset of industry valuations. In short, sellers were no longer willing to pay 2021 prices. Buyers, remembering how much restaurants sold for in 2021, were not willing to come down. That froze the market.
Many private-equity firms that traditionally bought restaurants seemingly exited the business, such as Sun Capital. Those firms may have wanted to buy, but their investors wanted some sort of return from their previous deals before they sent in more cash to get more deals done.
“It’s like the engine has stalled and needs starting again,” one investment banker said.
Some deals do get done, notably franchised deals. But franchises could be almost any industry, as it’s not so much about selling food to consumers as it is about selling the right to operate a business to a group of investors. Typically for a strong profit margin.
That’s what helped drive the $2 billion sale of Tropical Smoothie to the private-equity firm Blackstone.
But that deal also represents something of an opportunity. The smoothie chain has been a consistent grower. That could be a potential IPO opportunity down the road, as the equity markets lack that sort of growth.
And indeed, quality brands can get sold in any market. Jersey Mike’s, for one, could have fetched an $8 billion valuation, or perhaps more, if the company did opt to hold an auction. Sources say there are other quality deals on the market right now.
“We have lost a few because they are actually good deals and buyers are paying up for them,” one private-equity source told me.
Said Benn: “There’s a lot of need to do deals. And there’s a lot of businesses that are actually performing quite well that are generating very strong business.”
Benn has letters of intent to sell four different restaurant companies to private-equity firms or private-equity-backed strategic buyers. And he’s working on several other deals.
“I’m as busy as I was in 2021,” he said.
“... all but the stoutest and most well-capitalized service industry interests may find it increasingly challenging to serve customers.” -the American Institute for Economic Research.
The MOD effect
Still, shortly after news broke last week that MOD Pizza was considering bankruptcy, we heard from one investment banker furious, at MOD, for what they saw as a house of cards having a negative influence on the market.
The fast-casual pizza chain chewed through cash, grew too quickly and is now paying the piper. The banker, speaking privately, worried that it would make the industry look worse than it is.
And that might chill the market and make it harder to get some other deals done.
Indeed, in many respects investors have chilled on the industry, at least if you look at publicly traded companies. The typical restaurant company stock declined 12.5% in the first half of the year despite an otherwise strong year for stocks.
Traffic is down, likely bringing down sales, and the industry is at the outset of a value war, at least among fast-food chains. But full-service brands aren’t exactly flourishing, either, as consumers cut back on dining out.
A lot of companies are filing for bankruptcy or closing restaurants or are in some form of workout. Tijuana Flats and Rubio’s filed for bankruptcy, as has several small chains. BurgerFi needed some rescue cash and its debt was acquired by Crivello’s company. Uncle Julio’s is having challenges. Hooters is closing restaurants.
Oh, and Red Lobster declared bankruptcy, one of the largest such filings in industry history.
Some of these issues, notably Uncle Julio’s and BurgerFi, involve L Catterton, historically a common buyer of restaurants.
Experts believe more of these deals will be coming over the next year or two, as companies work their way through financing challenges.
The bankruptcies, coupled with declining traffic and stock price and margin concerns, suggest the industry is in the midst of a decline. “Insofar as those economic conditions persist,” the American Institute for Economic Research wrote recently, “all but the stoutest and most well-capitalized service industry interests may find it increasingly challenging to serve customers.”
“It’s totally healthy. It’s a cycle. You see it every 10 years. And it’s good.” -Josh Benn.
The reset
But the restaurant business features a lot of companies that do a lot of things that maybe they shouldn’t, at least if they want to ensure their business lasts over the long term. At any one time, there are a few of these companies that struggle, file for bankruptcy and get sold.
When the industry goes through a tough time, we can see a few such filings.
The restaurant industry is likely in a recession right now. But many of the brands that are filing for bankruptcy and closing locations are overleveraged, signed too many expensive leases, spent too much on corporate overhead, or some combination of all the above.
Many brands survived the pandemic at least in part because they received government funds through programs such as the Paycheck Protection Program. They held on, hoping for interest rates to come down. That hasn’t happened yet, prompting lenders to call loans and companies to declare bankruptcy as they work to close locations and get to profitability.
“Brands that are overlevered are the ones shaking loose right now,” Crivello said.
MOD Pizza is one such example. The fast-casual pizza chain was one of the fastest growing restaurant chains in the U.S. before the pandemic. It raised more than $300 million from investors and burned through cash aggressively expanding into new markets, often signing leases for weak locations or spending too much for good ones.
The company came perilously close to filing for bankruptcy, and still could, but was sold on Wednesday to Elite Restaurant Group. And other buyers hoping for a deal looked at MOD Pizza. More than one investment banker or investor we spoke with called MOD “a mess.”
Elite, Crivello’s group and companies such as Saladworks owner Woworks are among at least 10 multibrand “platform companies” actively targeting low-priced deals. Some of them include franchisees such as Sun Holdings, a big operator of Burger King and Popeyes that just bought the debt for Uncle Julio’s on the secondary market.
“We’re bullish,” Kelly Roddy, the CEO of Woworks, said on this week’s episode of the Restaurant Business podcast A Deeper Dive. “We believe that people are going to eat, right? Whether they eat at home or at out, they’re going to eat.”
That makes this more like the post-recessionary period of 2010, when a bunch of companies filed for bankruptcy and were snapped up by companies such as Landry’s, owned by now-billionaire Tilman Fertitta.
The brands filing for bankruptcy will close locations, recapitalize their business and open more supply for other concepts that might be more attuned to modern tastes or may not make the mistakes their predecessors did.
And maybe they’ll open up supply to up-and-coming brands more attuned to the needs of the modern consumer, much like the post-recession era led to the growth of much of the fast-casual sector. Some of those new brands will do well. Others will grow too fast, take on too much debt, and in a decade or so, we’ll be having another conversation along these same lines.
“It’s totally healthy,” Benn said. “It’s a cycle. You see it every 10 years. And it’s good.”