Franchises Dominate M&A in '08

According to new data from investment bank J.H. Chapman Group LL, merger-and-acquisition activity in 2008 was driven by franchisor and franchisee deal making.

"The largest group of last year’s transactions, or 40 deals, occurred between franchisors and franchisees. In addition, many transactions had tones of distress, the research showed, as 21 announcements came from restaurant companies in financial difficulty, up 31 percent from 2007."

“... The franchise market is driving transactions for two reasons,” said David Epstein, a J.H. Chapman principal. “First, franchisors are selling restaurants so there is more supply today, and second, there are still lenders willing to provide financing to tier one franchisees looking to expand within their own concept.”

Last year numerous franchisors initiated, or more aggressively pursued, refranchising strategies to reduce corporate capital expenditures and conserve cash in the tighter economy. Well-capitalized franchisees were able to take advantage of these programs to expand with new unit purchases. Some of the larger deals included NPC International and Pizza Hut, Apple American Group and Applebee’s, and numerous franchisees within the Hardee’s chain.

Unlike in years past, traditional change-of-ownership deals covering the purchase of an entire concept fell in 2008. Just 20 deals involving an operator purchasing another concept were announced last year, down 44 percent from 36 such deals in 2007.

When credit markets were flush and operators had excess cash from robust sales, portfolio diversification was en vogue, exemplified by the growth of McDonald’s, Wendy’s International and Brinker International, which each purchased numerous chains. Today, however, more restaurant companies are divesting brands rather than acquiring them. A total of 81 deals were marked as divestures in 2008, up from 72 such deals in 2007, J.H. Chapman’s data shows.  - NRN

PDF of J.H. Chapman’s full report.