The 2008 Chain Restaurant Merger & Acquisition Census
2008 Census Overview
The Census captured 116 announced transactions, 3.6% more than in 2007. Five public and three going private transactions were recorded in one of the worst public markets in recent history. Chains in trouble found new owners through court supervised sales and lender “encouraged” changes. Franchise unit sales increased significantly as several major franchisers embarked on refranchising programs. Equity funds continued to acquire in the industry representing 33% of all transactions. Buyers reduced their desire to diversify but still accounted for 33% of all transactions. Significantly more asset transactions were announced with many structures that favored cash.
The Chain Restaurant Merger and Acquisition 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 is headquartered in the United States and has 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 companies
- 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 2008 and 2007.
Type of Buyer
Equity funds continued to make significant investments in the industry despite the weak credit markets. Thirty-eight deals were announced, up 12% from last year, with nearly one-third of all reported transactions. Franchisees took advantage of several refranchising parent programs which together represented 22% of this year’s activity, up 56% from last year. Likewise, franchisers found more value in purchasing their own franchisees than diversifying into new brands. Operators buying new concepts fell by 44% yet franchisee purchases still represented one out of five announced private transactions, demonstrating that deals were negotiated at acceptable values. The public market remained essentially closed as only two chains announced registration for initial public offerings, two private placements of listed securities and one public stock exchange.
Geographical Region of Target Company
The North Central region had the largest increase in activity from last year, yet as in the last several years, the Southern region posted the largest number of transactions. Acquisitions of foreign companies involved domestic equity funds acquiring Canadian operations as well as operating companies acquiring their franchisees and new concepts.
Industry Segment
QSR led this year’s activity with 54%, followed by Full Service Chains with 42%. The Midscale Casual and Pizza segments reflected the refranchising goals of three large players in their respective segments. Several relatively small transactions dominated the Sandwich segment.
Reason for the Sale
More troubled chains found new owners than last year. Several sales involved court supervised arrangements. As in prior years, most sellers indicated that their primary reason for selling was that the chain no longer fit their goals or objectives. Only three companies announced plans to go private, none of which were completed.
Type of Deal
Significantly more asset than stock deals were recorded, with several structures that favored cash. The large number of asset purchases continues the trend from the last several years where buyers favor purchasing assets for tax reasons. In almost all cases, franchisee purchases were asset transactions. Some new acquisition structures involved seller financing, earn-outs and existing loan purchase discounts. Equity fund buyers seemed to be creative in developing structures to bridge the ever-present gap between buyer and seller valuations.
Reason for the Purchase
Buyers of all types acquiring new concepts declined by 14% this year, yet still represented the largest category with 33% of total activity. Investors remained interested in the sector as many equity funds and individuals acquired significant positions in 28% of the companies included in the Census. Strategic buyers expanding their brand reach dominated the franchise purchases this year.
David L. Epstein can be contacted at depstein@jhchapman.com and at (773) 693-4800.
