Krispy Kreme‘s announcement this month that it’s putting Insomnia Cookies up for sale has bankers chewing on who will be interested in acquiring the company. We spoke to a group of them. Here’s their list of potential buyers.
“We’ve been seeing M&A activity in the sector,” says Uj Rai, a vice president at Atlanta-based investment bank Configure Partners. “It’s most likely that a strategic scoops this up, whether it’s a private equity backed-restaurant platform, like Inspire with Roark, or Fat Brands (Nasdaq: FAT), or like a Garnett Station. I think it’s likely some form of a restaurant holding company or otherwise a larger brand aggregator that ends up being most logical.”
Philadelphia-based Insomnia is known for making cookies and other snacks. The company operates 250 stores, mostly franchised. It’s known for staying open until 3 a.m. and delivering to college students, and for its e-commerce capabilities. Krispy Kreme acquired a majority stake in Insomnia Cookies in 2018. At the time, Insomnia had around 130 stores.
In this market, strategics are using the economic downturn to reshuffle their portfolios and reprioritize their capital spending, including shedding noncore assets. Insomnia is not a distressed asset. Krispy Kreme just wants to focus on selling doughnuts.
So let’s handicap the potential buyers bankers think the asset may go to.
Roark Capital Group
Roark is known for buying franchised restaurant chains. The Atlanta PE firm, a behemoth in the space with $37 billion in AUM, announced a deal to acquire Subway earlier this year. Roark has two franchise-focused restaurant platforms. Inspire Brands owns Arby’s, Buffalo Wild Wings and Dunkin, among others, while Focus Brands’ portfolio includes Carvel, Cinnabon and Jimmy John’s. You can’t count out Roark for any kind of a restaurant-related deal.
Garnett Station Partners
Garnett Station is a New York-based private equity firm with a history of investing in restaurants. The firm raised its fourth fund at $850 million earlier this year, and has about $2 billion in AUM. Led by former L Catterton and Apollo executives, the firm acquired casual dining chain Firebirds Wood Fired Grill this year. Some of its other investments in this sector include Authentic Restaurant Brands and Carrols Restaurant Group. This partnership has worked for years with franchises. Insomnia could be a great fit in their portfolio.
Fat Brands
This publicly traded company recently acquired Smokey Bones from Sun Capital, its 18th restaurant brand. The Los Angeles-based company owns and franchises about 2,300 restaurants globally including names like Johnny Rockets and Hurricane Grill & Wings. The company is expected to look for more deals to expand its franchise portfolio and based on what the company stands for (FAT = Fresh, Authentic &Tasty), Insomnia would fit the mold.
Roark and Garnett Station declined to comment, while Fat Brands did not respond to requests for comment.
A Krispy Kreme spokesperson said: “The process is ongoing and the company does not intend to comment further until it determines that further disclosure is appropriate or necessary.”
Dealmakers agree that now is a good time for Krispy Kreme to sell Insomnia because of the dearth of quality companies available on the market. Even with consumers focusing on eating healthier, they will still indulge.
“Insomnia has experienced phenomenal unit count growth over a relatively short period of time, in part, due to much smaller retail space requirements and the ability to operate with fewer employees and offer much higher store operating margins relative to fast food establishments,” says David Stiles, managing director at Trinity Capital, a division of Citizens Capital Markets.
“Top line growth has been equally impressive and new units that have opened offer incredibly quick payback and impressive return on investment,” he adds. “For these reasons, brands like Insomnia are highly coveted. Divesting the brand at a time when supply of high-quality targets in the space has been pretty scant is perhaps the best strategy to reward shareholders. I would expect the brand to fetch a pretty high premium multiple.”
But the Insomnia story isn’t all sugar-coated.
Foley & Lardner Partner Chris Cain says a potential reason Krispy Kreme wants sell Insomnia is due to increased competition. Rival Crumbl Cookies, which has over 900 stores, is gaining on them.
“They could be afraid of the freight train that is Crumbl,” Cain says. “They’re expanding so rapidly that maybe in the back of Krispy Kreme’s mind is ‘What are we going to do if Crumbl decides to go after the up until 3 a.m. crowd?’, which they could do.
“If I were Krispy Kreme, I would say, ‘I don’t really want to be in the crosshairs owning Insomnia.’ That could be another thing that they’re worried about – that this may be the peak value for Insomnia if Crumbl continues to expand at the rate they are.”
Cain’s prediction of the buyer?
“I would be shocked if it wasn’t a PE firm that buys them,” he says.
Reach these restaurant dealmakers:
Rai: [email protected]
Cain: [email protected]
Stiles: [email protected]
