On Tuesday, the Brazil Journal generated some buzz by saying that Burger King’s owner, Restaurant Brands International, is “considering” a bid for Domino’s Pizza.
The report said that RBI has also considered Yum Brands, but Domino’s is smaller, “more digestible,” and has embraced technology better than any other company in the restaurant industry.
To be sure, “considering” is a heck of a lot different than “making an offer” or “buying.” I once considered a purchase of a Lamborghini Aventador—it doesn’t mean I bought one.
But the report is out of Brazil, which happens to be the home of 3G Capital, the massive private-equity firm that engineered the creation of RBI, which also owns Tim Hortons and Popeyes Louisiana Kitchen.
And 3G has certainly made giant, out-of-nowhere bids for companies before. The aforementioned Tim Hortons deal came in 2014 and was valued at $11 billion. The firm certainly has the wherewithal and the connections to swallow just about anybody in the restaurant business not named McDonald’s.
That doesn’t mean it would happen.
A Domino’s deal would cost RBI about $15 billion, on the conservative end, given the company’s $12.75 billion enterprise value. That would represent a purchase multiple of more than 28 times earnings before interest, taxes, depreciation and amortization, or EBITDA. That would easily be a record for a restaurant acquisition.
Earnings multiples like that are increasingly useless in an environment in which some buyers see long-term earnings potential with potential acquisitions—last year’s deals for Panera Bread and Popeyes both exceeded 18, a multiple long thought unheard of in the restaurant business.
Someone like 3G is probably looking at the purchase price and not the multiple. It’s made far bigger deals than a potential $15 billion Domino’s acquisition.
In addition, one could make an argument that Domino’s status as a technology company that sells pizza, rather than a pizza chain that uses technology, has earned itself a multiple more in line with other technology companies.
Someone like 3G could step in, buy Domino’s, and then outsource the company’s technology and its delivery capability, first to Burger King and Popeyes. Investors have routinely asked Domino’s if it would ever consider outsourcing its delivery and technology capabilities.
And RBI definitely wants to increase the use of technology inside of its brands. The company recently added a C-level executive position, naming former CFO Josh Kobza its chief technology and development officer.
All of this sounds as if I’m talking myself into a 3G-buys-Domino’s scenario. But it’s still doubtful.
For one thing, Domino’s doesn’t quite fit RBI’s strategy. Domino’s already has a significant international presence, with more than 9,000 locations outside the U.S. That automatically limits the deal’s growth potential.
Burger King, Tim Hortons and Popeyes all had relatively limited presences in international markets that made those acquisitions cheaper and more desirable. The company has then aggressively grown those chains overseas.
Domino’s international presence doesn’t necessarily preclude a deal. But if RBI wanted to make an acquisition in the pizza market, a much more realistic target would be Papa John’s—a deal that has been speculated for months.
Papa John’s would come at a fraction of the cost. And only 1,600 of the chain’s more than 5,100 locations are outside of North America — making those markets ripe for aggressive, RBI-style development.
While Papa John’s doesn’t get the publicity Domino’s does with technology, it’s hardly a Luddite—like Domino’s, more than 60% of that chain’s orders come through digital channels that have expanded rapidly in recent years. Papa John’s also delivers.
And Papa John’s valuation is down by more than a third over the past year.
Domino’s, meanwhile, is trading close to its all-time high and is up 17% over the past year at a multiple already higher than a price anybody has paid for a restaurant chain of any size.
Then again, nothing in the current M&A environment would be all that surprising.
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