Investors’ appetite for restaurant chains was insatiable in 2017.
There were 36 acquisitions of restaurant brand operating companies with at least 15 locations this year, according to a Restaurant Business analysis. That’s a 90% increase over 2016, when there were 19 deals, and a 44% increase over 2015, when there were 25 acquisitions of such chains.
And that doesn’t include major mergers and acquisitions such as Amazon’s purchase of Whole Foods or mini-IPOs such as the Fatburger offering in October—both of which made my list of the 10 biggest deals of 2017.
The increase in restaurant acquisitions in 2017 reveals a newly aggressive buyer, as investors ponied up high prices for well performing chains even as they largely ignored companies with poor track records.
But it also shows the valuations of some chains came down to the point that it made financial sense for a buyer to take a chance.
In 2016, for instance, restaurant buyers largely sat on their hands in part because the prices for brands were high, making them less desirable for private equity groups or other strategic buyers to make a move.
Instead, investors went “down market,” bidding for small, upstart chains. In 2016, there were at least 19 acquisitions or investments in chains with 15 or fewer locations, which was likely a record for such early stage investments.
Roark Capital’s investment in Jimmy John’s in late 2016 likely broke the dam and opened the way for a year of massive restaurant brand sales.
The Champaign, Ill.-based sandwich chain had explored an initial public offering in 2015 but backed out of that deal. Instead, the chain’s private equity investor sold out, and founder Jimmy John Liautaud also sold some of his stake in the business.
That set the stage for a 2017 that has been remarkably active. It included large multiple deals for big, limited-service restaurant chains, including Panera Bread and Popeyes Louisiana Kitchen.
It also included sales of struggling chains, such as Joe’s Crab Shack and Ruby Tuesday.
There are many reasons for so many deals. For one thing, interest rates are low, and lenders are eager to make deals. That enables buyers to spend what it takes to get what they want—enabling such high multiples for restaurant deals, which have skyrocketed in recent years.
In addition, there are simply more buyers. Private equity groups and family offices, for instance, have rushed to the space in part because there’s a perception that other consumer sectors—like hotels or retailers—are under pressure from external threats such as the internet, while restaurants have no such issue.
Strategic buyers such as Darden and Restaurant Brands International, and now Arby’s, have also shown a willingness to make acquisitions.
More buyers usually yield more acquisitions. And they tend to drive up prices.
This era is unlikely to end in the next few months, though it’s difficult to imagine there being as many acquisitions in 2018 as there was in 2017.
Many publicly traded restaurant companies are trading at historic lows, which could prompt a private equity buyer to take a chance on buying them. With interest rates creeping up, meanwhile, some brands could put themselves up for sale, thinking that this is the last chance to sell while prices are so high.
And the buyers are still out there. JAB doesn’t appear to be slowing down. Roark is raising a $5 billion war chest. Other private equity buyers could join the fray, too, not wanting to be left out.