Louisiana fast, Wall Street lavish.
Restaurant Brands International Inc. -- the company formed from the 2014 merger of Burger King and Tim Hortons -- is now paying top dollar to acquire Popeyes Louisiana Kitchen Inc. amid slow-moving progress in achieving its own growth goals. The $1.8 billion transaction values the fried-chicken chain at more than 6 times the revenue it generated last year. That's the highest sales multiple ever paid for a North American restaurant company, according to data compiled by Bloomberg. At 21 times Ebitda, the takeover valuation is on the expensive side by that measure as well.
But if there were ever a time for Restaurant Brands to pursue this deal, it's now. The management team at Popeyes, one of the most under-leveraged businesses in the industry, had been planning to add a lot more debt this year to create a more optimal capital structure. They were targeting a leverage ratio of 3.5 by the end of 2017, a big boost from 1.8 last year. The funds would be used to grow the company from its roughly 2,600 restaurant locations and almost $270 million of annual sales, as well as to continue repurchasing shares.
The relatively steep takeover price compensates Popeyes shareholders for the would-be growth opportunities that Restaurant Brands is intercepting. (See this Gadfly for a look at the acquisition candidates it passed up for Popeyes.)
It's been a little more than two years since Brazilian private equity firm 3G Capital combined Burger King and Canadian coffee-and-doughnut shop Tim Hortons into what is now a fast-food giant valued at $27 billion. You've heard a lot about 3G lately -- they're also the dealmakers behind packaged-food company Kraft Heinz Co., which over the weekend dropped plans to pursue Europe's Unilever after news of the talks leaked out too early.
While 3G's famed drastic cost-cutting strategy has been enhancing Restaurant Brands' bottom line (and Kraft Heinz's), the international growth that was promised is taking longer than expected, as I wrote in December when I graded the merger "meh," the midpoint of five ratings Gadfly assigns past deals.
In announcing the Popeyes acquisition, Restaurant Brands again noted the global expansion opportunity as it works to justify the "International" in its corporate name (Restaurant Brands cites more than 20,000 restaurants in more than 100 countries, but sales still skew heavily toward North America). It will be much easier to bring the fast-food chicken concept to more international markets than a coffee shop named for a hockey player who is little-known outside of Canada. The majority of Popeyes' international franchised restaurants are in Turkey, South Korea and Canada. Competitor Yum! Brands Inc. has led the way abroad, having already brought its KFC and Taco Bell chains to China and elsewhere.
There's also room to grow Popeyes within the U.S. While it has a presence across the country, most locations are concentrated in just 11 states. Adding the chain to Restaurant Brands will also fashion the company more like Yum! Brands, which even launched some KFC-Taco Bell combo locations. Perhaps Burger King and Popeyes could do something similar to capitalize on Popeyes' cult-like following.
The clearer growth path makes the $1.8 billion Restaurant Brands is paying for Popeyes look reasonable, even if the valuation is on the high side. Tasty for both sets of shareholders.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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