Long John Silver's, A&W, Arby's To Be Sold; What to Watch

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.

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The Rabbi Trust

Nelson Peltz (Arby’s, Triac & HJ Heinz BOD) and Sidney Feltenstein (Long John Silvers, A&W Root Beer, & Burger King) are part Robert Rosenberg’s circle of friends and financiers. Mr. Peltz's Cadbury Schweppes was part of the Britvic Group that is now known as Guinness Bass Bottling Co. Britvic was majority owned by Allied Domecq North America where Robert Rosenberg was Chairman. Other shareholders included PepsiCo (Triac/Yum Brands) and Diageo (Bass/Guinness/Burger King). Sid Feltenstein managed Dunkin's Ad Fund float through 1990 when it was acquired by the White Knight - Allied Lyons PLC

Lyons Tetley (now Tata Group), United Biscuits (now HJ Heinz), and Sara Lee were the J. Lyons & Co entities that the Rosenberg’s began to do business with in the late 1960’s and early 1970's. They forged a strong shareholder stake, in 1978, when J. Lyons & Co merged with Allied Breweries. Thereafter, the Dunkin' franchisees were given the DCP platform in 1982. Today’s Dunkin’ Brands Inc is the former J. Lyons & Co. entity.

The cost benefits of the Dunkin' supply chain are now being stretched away from the commodity source as their prices are escalating. The impact is due to private equity squeezing themselves into the franchisee owned supply chain. Starbucks plans to cut their distribution ties with Kraft on March 1, 2011. The reason can be found in Seattle’s Best Coffee that was purchased by Starbucks from AFC Enterprises (Jon Luther/Popeye’s).

Coincidentally, Long John Silvers and A&W are also up for sale by Yum Brands (formerly known as Triac). As these individuals approach their mid-70’s, being part of the baby boomer generation, they are looking to “harvest” their respective equity investments. Hence, the IPO of Dunkin’ Brands Inc is now forthcoming – I expect June 2011. However, there are significant "issues" in going public that need to be overcome first. Depending on how the "concerns" are resolved will delay the eventual IPO. Others on The Street expect sometime between November 2011 and January 2012 due to Dunkin's recent recapitalization, in November 2010, and the need to compare Same Store Sales.

The last remaining Dunkin' Rabbi Trust (ESOP) holder - Al Hodges - announced his resignation from Dunkin’'s Executive Management Team this week. Luther stepped down a few weeks ago. The required pre-IPO recapitalization of the securitization and the dismantling of the “old” Dunkin’ executive team (ESOP participants) is now complete.

When food franchises are traded private to public - and, vice versa - it is to the determent of the domestic franchisee stakeholders. At the end of the day, franchisee “issues” are about money and equity.

franchisee pain thresholds

When food franchises are traded private to public - and, vice versa - it is to the determent of the domestic franchisee stakeholders.

When any franchise is traded in any way, public or private, it is an absolute rarely that franchisees do not lose at least some if not all profitability over time.  I would suppose that the more often a franchise is traded the less successful are its franchisees.  I would like to hear about the exceptions to the rule.

The cost benefits of the Dunkin' supply chain are now being stretched away from the commodity source as their prices are escalating. The impact is due to private equity squeezing themselves into the franchisee owned supply chain.

That is seemingly the most common start-up method for enhancing a new franchisor’s investment return to the detriment of franchisees but with private equity investors I’d say the odds favor a higher level of franchisee pain.

As a long time Dunkin'

As a long time Dunkin' consumer, I've been wondering why I've been getting my donuts in a paper bag nowadays. They used to be bagged in a nice white wax bag with the logo printed on it. Now, by the time I get to my office, the donut grease protrudes, and is very visible, from the outside. I can't even use it as a paper weight on my desk. My "important" documents end up getting stained with grease. My Boss believes cleanliness is a character trait and it makes me feel bad when I shove those greasy donuts - I love - down my mouth.

Being a retailer myself, I know there's a big price difference between wax bags and paper bags. I suppose when private equity steps into the franchisee's supply chain, the number crunchers don't understand the business and the consumer's "love" associated with the Brand experience and value. This would definitely be to the detriment of the Franchise IP value. But hell, I guess those franchisees, who supply the capital to grow the Brand, need to turn profits as well.

I used to eat Fried Chicken from Popeye's until I lost my shirt buying AFC Enterprises' stock due to the 2000-2002 accounting scandal. Come to think of it: That was during Jon Luther's tenure right before he jumped ship and joined Dunkin' Brands Inc. Explains why the same "executive" faces are rotated through the "same" family of franchised brands.

Even though I prefer Hunt's Ketchup, for some reason every Fast Food joint I visit seems only offers HJ Heinz Ketchup. Hopefully, ConAgra is given a chance to bid on Mr. Rosenberg's family of food franchises ketchup supply chain. Free market price bidding should help lower the supply chain cost for those poor franchisees who thought they were partnering with the Brand.

Squeezing The Supply Chain

Ray: What I have noticed when franchises are traded - the "trading" overlaps with a churning of the franchisee base. Getting the "old" school wisdom out and replacing them with "new" school thinkers. The churning shuts everyone up until the "new" culture is embedded into the system.

The owners will generally attempt to escalate "new" franchise sales. If that fails, then they try alternative distribution channels left untapped by the previous managers. As those opportunities are exploited, the next phase involves extracting value from the supply chain.

When a franchise system is being "traded", the franchisees must have an effective and well capitalized IndFA ready to go to on the "offensive" to protect the interest of the franchisee community. However, as we have seen historically, it is often too late and after the system is "traded" the franchisees go into "spectator" mode versus being "vigilant" brand defenders.

Jon Luther will wind up...

wirth plenty of $ in overseas accounts and will be a spokesperson for IFA in his golden years.