The ease of borrowing is contributing to more M&A in the restaurant sector. Low interest rates, few covenants and low amortization schedules mean that dealmakers can expect 2014 to provide a good environment for companies to take on debt for acquisition purposes. This is a trend that has already appeared in deals, including transactions by Apollo Global Management LLC, TPG Capital and Roark Capital.
In February, Apollo closed a deal for CEC Enterprises Inc., the owner of 577 Chuck E. Cheese restaurants and entertainment centers for about $1.3 billion.
“The debt markets helped that deal get done,” says CIT Group Inc. (NYSE: CIT) managing director Bob Bielinski (pictured). New York-based CIT is a middle market lender that also provides leasing and advisory services.
Good debt markets also contributed to TPG Capital’s January acquisition of PJ United, which owns about 155 Papa John’s restaurant franchises in ten states. PJ United was sold by the Hallifax Group, a Washington,
D.C.-based private equity firm. That deal required a significant debt component, Bielinski says, though terms of that transaction were not disclosed.
In July, Atlanta private equity firm Roark Capital Group bought Miller’s Ale House, a chain of 65 restaurants that serve steaks, seafood and about 75 different beers.
Roark has a history of snatching up food chains in December, the firm followed the Miller’s deal by buying a majority stake in CKE Inc., which owns fast-food chains Carl’s Jr. and Hardee’s.
In November, Pizza Hut franchisee NPC International Inc., headquartered in Overland Park, Kan., agreed to buy 53 Wendy’s restaurants from a subsidiary of Wendy’s Co. (Nasdaq: WEN). NPC is owned by Stamford, Conn.-based private equity firm Olympic Partners.
Before that, in October, private equity firm Centre Partners bought a stake in Captain D’s Seafood Restaurants, which owns and operates more than 500 restaurants.
Moving forward in the middle market, expect to see continued consolidation of dining franchises, helped along by the favorable lending climate.
The debt market is also playing a role in sellers’ decisions to put companies up for sale. And when the debt market is combined with the valuation market, which has also recently favored sellers, many owners are opting to sell.
“The franchise owner population is graying, valuations are strong and there is capital available to finance those acquisitions, so smaller franchisees are selling. I think you’ll see that continue,” Bielinski says.