The 2005 Chain Restaurant Merger & Acquisition Census

2005 Census Overview
The Census captured 101 announced transactions, 15% fewer than in 2004 and 29% more than in 2003. Twelve public and six going private transactions were recorded demonstrating the strong interest in the public market. Equity funds and management teams found significant value in the industry this year accounting for 40% of all private company transactions, the highest showing in fifteen years. The high prices being paid by equity funds keep strategic buyers, both operators and franchisers, usually interested in diversifying, on the sidelines.

The Census reports change of ownership activity for chain restaurants in the United States. In order to be counted in the Census, a meaningful change of ownership must have been announced. The Census does not include routine trades of restaurant securities on a formal exchange, but does include initial public offerings, subsequent stock offerings, significant investments and, of course, traditional mergers and acquisitions. Restaurant chains qualify for the Census if either the acquirer or the target are headquartered in the United States and have at least four separate foodservice establishments of the same or different concept. Qualifying candidates include quick service, fast casual, full service and cafeteria/buffet firms.

The Census lists those transactions which have been announced during the census year. Some of the transactions may not have been completed. Chain Restaurant Merger & Acquisition Census.

The goal of the Census is to provide restaurant executives with comparative industry information to assist in making major strategic growth decisions. In addition to buyer, seller and target names and locations, the Census obtains the following information:

• The category of buyer (franchiser acquiring franchisee, foreign company, operator buying unrelated concept, public shareholders, present owner acquiring more stock, etc.).
• Asset acquired (capital stock, assets, expansion rights, etc.).
• Reason the seller was selling the target (financial difficulty, divestiture, cash for expansion, pay down debt, etc.).
• Principal reason the buyer acquired the target (investment, conversion, new concept, etc.).
• Geographical region of target company.
• Industry segment (burger, chicken, pizza, family, cafeteria, etc.).

Because the vast majority of the transactions are private and confidential, purchase price information is normally unavailable. While this information is useful, some buyers and sellers do not allow publication of this information in the Census.

Information is compared with prior years to assist in identifying trends. The following information summarizes and compares the key statistics of the Census for 2004 and 2005.

Type of Buyer
Equity funds and non-restaurant buyers were out in full force with both the largest number of transactions as well as the biggest increase from last year. Most notably, operators significantly reduced their desire to diversify, which had been the leading strategy in many of the prior years. As franchised brands redefine themselves, franchisees found reinvesting in their own units the most preferred capital spending strategy turning away from diversification. The high prices being paid by equity funds and equity fund-sponsored management buyouts deterred strategic buyers from winning auctions. Eight initial public offerings and four secondary offerings nearly matched public market activities last year.

Geographical Region of Target Company The North Central region had the largest increase in activity from last year, yet the Southern region continued to host the largest number of transactions. Several domestic multinational chains crossed borders to acquire their franchisees. Few foreign buyers were attracted to U.S. restaurant chains despite the continuing favorable currency exchange.

Industry Segment Unlike in prior years, there was no clear market segment leader. The Ethnic, Midscale Casual, Burger, Sandwich and Pizza segments each contributed double digit transaction counts this year. Seven Burger King transactions accounted for the single largest contribution to the Census by any one brand this year as it did last year.

Reason for the Sale Again this year, very few large chains grew through new acquisitions, while several announced divestitures through outright sales or public market offerings. The escalation in values among quality concepts prompted many privately held chains to test the market. Five public companies announced actions to go private (one announced twice), a significant increase from last year.

Type of Deal Both the drop in bankruptcy auction transactions and the acceptance of equity funds buying stock led to the significant decline in the number of asset purchases. This trend is likely to continue as buyers become comfortable with stock deals and sellers insist upon avoiding the double taxation which is sometimes associated with an asset deal. In 84% of the non-public market transactions, sellers insisted upon payment in cash.

Reason for the Purchase Equity funds and management teams responded to the favorable lending environment and perceived discounted brand value of chains relative to the broader market. Several equity funds were new to chain ownership. Only four buyers listed conversion of the acquired units as their primary reason for purchase, nearly the same as last year.

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