OK, so we were half right.
When we gave our argument for five acquisitions we’d like to see this year we listed a Yum Brands deal for a burger chain first, figuring that it was ready to make a deal and that a burger chain made the most sense.
We just didn’t think it would come this soon—or that it would be The Habit Burger Grill.
Yet Habit is a relatively easy acquisition for Yum, which owns KFC, Pizza Hut and Taco Bell and can get its fourth concept for $375 million, or $14 per share—certainly far easier than our idea, which would have cost Yum at least 22 times that price. Yum is proposing a multiple of just over 9 times earnings before interest, taxes, depreciation and amortization, or EBITDA, to take on Habit.
The fast-casual chain was available at that price because Habit has struggled with falling traffic and declining EBITDA margins as it focused primarily on company-operated unit growth.
Mostly Habit encountered a public equity markets largely skeptical of growth restaurant chains. The company’s stock price has hovered between $8 and $16 a share since 2017 and its pre-announcement valuation put it into the mid-single digits, making it a prime target for a takeover. Its $14-per-share takeout price is less than a half of what it had traded at in the months after its late 2014 IPO.
Indeed, Habit’s situation was similar to that of Zoe’s Kitchen before that chain was taken private by Cava Group in a deal funded by the Ron Shaich founded Act III Holdings. Zoe’s had been trading at a low valuation as it struggled to balance unit count growth demands with the need for increasing same-store sales. Ultimately it decided getting out of the glare of the public markets would be a better idea.
As part of Yum, Habit will remain in that spotlight as part of a public company that has to report its financial performance on a quarterly basis.
Yet it will be considerably smaller than any of Yum’s three chains, which combined operate more than 49,000 restaurants worldwide.
To put that into perspective: With 265 locations Habit would represent about half a percent of Yum’s unit count. Investors will ignore its performance while demanding that the Louisville, Ky.-based chain do things like fix Pizza Hut’s U.S. business.
In theory, Yum will be able to give Habit the things it couldn’t get on its own—access to the company’s digital and data science capabilities, for instance, and the company’s marketing expertise, among other things.
Habit will also get access to better deals on services such as delivery. That point is a big one for the burger chain, which can’t get the same rates that concepts like Taco Bell and KFC get from Grubhub thanks to its parent company’s deal with that provider.
Yum will likely refranchise Habit. At the very least the company will focus primarily on growing the business through franchising, and probably to the numerous existing operators of KFC, Taco Bell and Pizza Hut in the U.S. That could speed the chain’s domestic growth.
The risk for Yum is that Habit proves to be a distraction. With such a small base of units the chain will have little impact in terms of revenue and profits in the short term. If the company devotes a lot of its energy to that brand while taking its eyes off of, say, Pizza Hut, that could be problematic.
Yet the bigger challenge, perhaps, is that the new brand gets lost in the shuffle. In 2002, Yum Brands acquired A&W and Long John Silvers in a deal the company hoped would give it a menu of brands that it could co-locate nationwide.
Those brands over time were overshadowed by the three larger companies as well as Yum’s own effort to grow its China business. By 2011 Yum sold those two brands to focus on its three bigger chains.
Five years later it spun off that China business, a move that set the stage for this week’s announcement of the Habit deal, which if approved will be Yum’s first acquisition in the U.S. in 18 years.
It’s also yet another sign of the shift in thinking in the restaurant business. When Yum spun off China the industry was still in a less-is-more period, believing that focusing on a few concepts was better than collecting them.
Years of labor cost increases and profitability challenges and technology demands have changed that and now Wall Street is far more friendly to such deals, even if they prove to be distractions.
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