Restaurant Deals Surge: Activity Up 33%
Chicago, March 24, 2011 − The J.H. Chapman Group, L.L.C., an investment banking firm specializing in mergers and acquisitions in the food and restaurant industries, has just released its 2010 Chain Restaurant Merger & Acquisition Census. This comprehensive annual guide to acquisition activity in the retail food service industry, developed and analyzed by Chapman Principal David L. Epstein, provides unique perspectives on important industry trends.
Chain restaurant merger and acquisition announcements in 2010 increased to 89, up 33% from the 67 recorded in 2009 but down 24% from 2008. "Activity is stronger than last year, although it has not reached the record level of five years ago," stated Epstein. "In 2010, there was more availability in the credit markets for acquisition financing and fairly reasonable valuations. Combined with an abundance of equity capital and the need for restaurant growth financing, this produced a fairly robust marketplace for restaurant chains."
Equity funds continued to buy restaurant chains, nearly reaching the levels achieved in 2007 and 2008, and accounted for 36% of all announced private transactions in 2010. Equity funds investing in new concepts included Catterton Partners' majority stake purchase in Noodles & Company, 3G Capital's acquisition of Burger King, Oak Hill Capital Partners' acquisition of 24-unit Dave & Busters and Sun Capital Partners' acquisition of 36-unit Bar Louie.
Franchise related transactions were also up significantly. Acquisitions within the buyer's own brand were up 33% from the previous year. A major contributor to this year's increase in franchise purchase activity was the refranchising programs initiated several years ago by Applebee's and Jamba Juice. Epstein stated, "These highly synergistic transactions among franchisees of the same brand and the need by several franchisors to reduce corporate store territories prompted this high growth in this category."
Operators adjusting to the new recession environment and gaining confidence in existing unit economics felt more comfortable in seeking capital for growth. "The concepts that have either weathered or thrived during this tough climate found that both private and public equity providers were interested in providing this needed capital," stated Epstein.
Financially troubled chains, many under bankruptcy protection, completed sales at a near-record pace. Transactions involving companies in trouble were up 150% from last year, nearly equal to those reported in 2008. Examples of transactions involving companies with financial difficulty included the debt holders converting their debt to stock in Uno Chicago Grill, American Blue Ribbon Holdings' acquisition of 96-unit Max & Erma's, Luby's acquisition of Fuddruckers and Landry's purchase of Claim Jumper.
Diversification continues to be a leading reason that restaurant chain buyers pursue the acquisition of other concepts. For 2010, 57% of all non-public transactions involved a new concept for an existing restaurant chain acquirer, the reason most cited for making acquisitions in 2010.
Feeling the confidence in the strong public market, three restaurant chains filed for initial public offering including American Restaurant Concepts, the parent of Dick's Wings; Bravo Brio Restaurant Group owned by Castle Harlan and Bruckmann, Rosser, Sherrill & Co.; and 211-unit Logan's Roadhouse, which was ultimately sold to Kelso & Company, terminating the seller's effort to go public.
Commenting on the 2011 outlook for M&A activity in the chain restaurant industry, Epstein noted, "We were right on target in our prediction for 2010, but 2011 is much more difficult to predict as so many troubled companies have now completed transactions. We expect refranchising to continue, especially among leveraged franchisors and believe that the large chain spin-offs, such as A&W, Arby's and Long John Silver's to name a few, will be completed during the year."
Epstein welcomes questions and discussions concerning this year's Census findings.
Click here to download a PDF of the Chain Restaurant Merger & Acquisition Census 2010 Summary Report.