Friday, November 22, 2013

Crazy Deals Being Done In The Restaurant Industry!

This just popped in to the inbox.

"It is a great time to be in the restaurant industry. Publicly held stocks are trading at high multiples. IPOs have been all the rage. The success of the Potbelly and Noodles & Company IPOs and the dramatic increase in share price that followed reminds us of the hype around the Facebook and Twitter IPOs. Additional restaurant chains will be coming to market soon. Money is flowing to the industry from lenders and private equity investors faster than a roaring river, with many lenders financing large chains at rates under 5% with minimal covenants.

Private equity is investing like they never have before. Some sophisticated PE shops are investing in very small startup chains in the Fast Casual space. One example is the rush of money to the fast pizza segment, with service systems similar to Chipotle and 800-degree ovens that can bake a pizza in under three minutes. There are at least ten startup chains with PE backing rushing to become the first national player in this segment. Private equity is also willing to own large franchisees. There was a time several years ago when private equity would not own a franchisee at any price. Now, word on the street is that one of the large franchisees of a YUM Brands company sold for seven times EBITDA and a lender financed five times EBITDA. These dynamics are unheard of in recent history for the restaurant industry – they are certainly higher than anything we saw in the 2005–2007 timeframe.

These financing and investing trends are happening despite headwinds of almost no positive traffic growth in the casual dining segment, low single digit traffic gains in the QSR and Fast Casual segments, higher commodity prices (especially beef), and higher labor costs coming in the form of minimum wage increases and Obamacare."
A correspondent writes,
"Still no soft-serve IPO. Wings IPO (own financing of franchisees, what could go wrong?) (Tyson wings business tracking stock?). Better burger IPO."

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