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This week’s announcements that YUM will shop the Long John Silver’s and A&W Brands, and today's announcement that Arby’s will be shopped by Wendy’s/Arby’s means that multi-brand chain restaurant operator decombination is continuing. Here are a few things for franchisees to note about this trend.
Less is More: The stronger are jettisoning the weaker since there is some deal capability. Look at the difference between all the brands McDonald’s had in 2002 (several) versus now (one), for example.
It is 90% likely that Private Equity (PE) firms will be the buyers. PE firms still have unallocated capital that they must put to use.
YUM is an extraordinarily complicated company with most of its emphasis on China and International, where the older US brands are perceived much differently than here and have much higher average unit sales (2 times that of US) and very fast, 2-3 year cash on cash returns. The 2002 LJS/A&W merger was to buy YUM capability of multi-brand individual unit combinations with those brands. Nine years later, that strategy is dead with both YUM (and Dunkin Brands) abandoning it.
Wendy’s/Arby’s: With lunch/dinner only sales at $1.4M, pretty high in the QSR space, Wendy’s has a very nice platform to build upon once they get breakfast in place and is truly an opportunity. With 2 years plus of negative sales comps, we can imagine the stress throughout the Arby’s community. Of course, Arby’s underperformance is a huge stock price depressor/overhang issue.
Notes for Franchisees: here’s a checklist for franchisees to ponder as this goes down:
Price, leverage and cost of capital: How much is the EBITDA multiple and total debt, what is the debt/equity mix, what is the effective cost of both (the PE firm will want a return on its equity invested), what is the resulting debt leverage and what’s the cost of capital. Also look for capital expenditure (CAPEX) caps.
Since these chains are primarily US based, new management has to get a creative game plan to concentrate and fix the US business first, including franchisees. It’s not good enough to say they will grow internally. Our opinion is that older unit site rationalization (closings/relocations), along with franchisee workout and reorganization will be essential.
Quality of executive leadership: The industry has a track record of rotating industry veteran CEOs from chain to chain. A US expert with a record of working with franchisees is important.
Franchisee Association infrastructure: Now is the time to communicate, get positions set, document restaurant operation specific learnings and data (you’re not surprised what data the franchisor doesn’t have!) and be ready when the deal due diligence folks call. Its highly likely this degree of due diligence will be far greater than in the past.
Money talks but unified, solid, fact based franchisee opinions matter: Franchise organizations are highly valued for their “predictable” cash flow, low CAPEX and isolation from commodity cost swings, but the specter of imploding franchisees business models is known, too (think: Quiznos) and will be a deal consideration.