Restaurants are buying up other chains

The Bottom Line: Deals such as Arby's acquisition of Buffalo Wild Wings show a shift in investor thinking.

The Bottom Line

Some of the biggest buyers of restaurant chains in recent years have been other restaurant chains.

Strategic acquisitions by restaurant chains were surprisingly common in 2017, with 14 such deals. That was more than a third of the 37 acquisitions of restaurant-brand operating companies last year.

The strategic deals include some of the best known and most well-funded acquirers, with private-equity groups backing the creation of potentially big, multibranded companies.

That includes Arby’s $2.9 billion acquisition of Buffalo Wild Wings, funded partly by Roark Capital. It also includes the $1.8 billion purchase of Popeyes by Restaurant Brands International, created just three years earlier with the merger of Burger King and Tim Hortons, fueled by the private-equity firm 3G Capital.

And JAB Holding, which has been collecting coffee and breakfast chains like some of us collect stamps, funded a pair of strategic deals—the acquisition of Au Bon Pain by Panera Bread and the purchase of Bruegger’s Bagels by Caribou Coffee.

The flurry of strategic deals seems to represent a shift in thinking among investment companies. Historically, investors pushed for focus among restaurant operators, preferring companies that own one or two brands rather than big, multiconcept companies.

Theoretically, operating more than one brand distracts executives, while investors often don’t give a company enough credit for all of its assets. That typically leads activist shareholders to push companies to spin off secondary concepts to “unlock” their value.

The big question is whether the flurry of strategic deals represents a broad change in thinking among restaurant investors, or whether this is just an anomaly brought on by a small number of well-funded interests.

“We’re in a period with some sophisticated, strong corporate entities with resources that can help an existing brand grow or provide a lift to a larger chain based on marketing, operational or other resources,” said Chris Sciortino, managing director with Baird. “I don’t know if that ultimately creates a blueprint for other brands to head down that path. Focus continues to be the mantra” on Wall Street.

Indeed, last month, Jack in the Box opted to focus on its core brand with the $305 million sale of the fast-casual burrito chain Qdoba. Activist investors had been lurking around that company.

And activist investor Jana Partners is taking a close look at Outback Steakhouse operator Bloomin’ Brands, potentially pushing the company to unload one or more of its four concepts.

Still, maybe the biggest indication of a potential shift in thinking is with Darden, the owner of Olive Garden, LongHorn Steakhouse, and now Cheddar’s Scratch Kitchen, which it acquired last spring.

Just three years earlier, the company sold Red Lobster amid pressure from shareholders to split into two or more pieces.

The biggest differentiator in whether shareholders will accept companies that acquire appears to be performance.

Companies that are more successful tend to get license from investors to buy more brands, while those that struggle will get pressure to sell.

Darden’s sale of Red Lobster and the pressure to split apart came as the company and its flagship brand Olive Garden were struggling. It was able to acquire Cheddar’s last year in part because all of its brands were performing strongly.

And multibrand companies appear to be in vogue in part because a number of companies have succeeded in generating valuation growth by doing so.

Yum Brands, for instance, has successfully operated a trio of giant chains in many countries and, after spinning off its China operations, seems perfectly content with Taco Bell, KFC and Pizza Hut. The company has been a strong performer on Wall Street since that spinoff.

Other, smaller companies also continue to be active, pursuing strategic deals. Houston-based Landry’s, which bought Joe’s Crab Shack last year, is always a threat to buy something. Canadian food chain collector MTY Food Group, which bought The Counter, is also on a constant lookout for deals.

And Fatburger owner Fat Brands went public last year explicitly to help fund its acquisitions—which last year included Ponderosa and Hurricane Grill.

Such companies will likely continue to be active this year, promising more strategic deals to come.

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