The 2006 Chain Restaurant Merger & Acquisition Census
2006 Census Overview
The Census captured 107 announced transactions, 6% more than in 2005. Eight public and nine going private transactions were recorded demonstrating the strong interest in the public market. Equity funds and management teams bought heavily into the industry this year accounting for 30% of all private company transactions, continuing the trend established several years ago. The high prices being paid by equity funds did not deter franchisees and franchisers from acquiring units of their own brand.
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.
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 2005 and 2006.
Type of Buyer
Equity funds and restaurant operators recorded the largest number of transactions. Most notably, operators increased their desire to diversify, which was missing last year. After spending time reinvesting in their own units, franchisees once again began purchasing other franchisees within their brand. The high prices being paid by equity funds and equity fund-sponsored management buyouts seems to be catching on as strategic buyers began to win auctions. Public market activity declined this year with only seven initial public and one secondary offering announcements.
Geographical Region of Target Company
The West region had the largest increase in activity from last year, yet the Southern region continued to host the largest number of transactions. The North Central region posted the largest decline in number of transactions. More foreign buyers were attracted to U.S. restaurant chains reflecting the continuing favorable currency exchange.
Industry Segment
The Ethnic segment led the Census this year comprised of eight Mexican, six Italian, two BBQ and two Asian transactions. Starbucks announced four of the sixteen Family/Coffeeshop transactions, which recorded the highest increase over last year.
Reason for the Sale
Again this year, relatively few large chains diversified through new brand acquisitions. There were several announced divestitures through both public market spin-offs and outright sales. The escalation in values among quality concepts prompted many privatelyheld chains to again test the market. There was a significant decline in the number of troubled chains that were sold. Nine public companies announced actions to go private, a significant increase over the last two years.
Type of Deal
Because equity funds usually buy stock and because there was a reduction in bankruptcy auctions, a drop in the number of asset purchases occurred. This trend is continuing as buyers have become comfortable with stock deals and sellers insist upon avoiding the double taxation which is sometimes associated with an asset deal. In 90% of the non-public market transactions, sellers received payment in cash.
Reason for the Purchase
The favorable lending environment allowed equity funds and management teams to continue their interest in restaurant chain acquisitions. Even franchisees found their expansion fueled with acquisitions. With such aggressive valuations, buying to convert the acquired units to the buyer’s concept continued to lose favor with buyers.
David L. Epstein can be contacted at depstein@jhchapman.com and at (773) 693-4800.
