KFC Franchisee Bankruptcy Auction Outcome, Store level Sales, Profit Values Seen

February 24th, 2012

110 US KFC units of Kazi Foods (NY, NJ, FL, MD, MI) have been sold at auction, for $56.2 in total consideration, primarily via debt assumption. Cash proceeds were only $2.8M. The filing gives a glimpse of KFC sales and EBITDA in these markets: AUV of $973K and a EBITDA margin of only 7.8%

30 KFC units in these markets had been closed earlier. Kazi was the 12th largest franchisee in the US but retains other KFCs and other concepts elsewhere. Such a low store level margin makes it almost impossible to service debt and provide funds for maintenance CAPEX, and required remodels/upgrades.

With the net consideration paid of $56.2M and EBITDA of $8.6M, this rerpresents a price to earnings multiple of 6.5X. On the surface, this was a healthy price. But we understand there was real estate involved, thereby making the transaction a bit more diffcult to benchmark as purely a restaurant transaction.

http://www.restfinance.com/content/story.php?=00777

Granville_Bean

February 27, 2012 - 10:14am

Real Estate

As noted, without a figure for the real estate interests included, there is no way to accurately value the restaurant operating component. On its face, a purchase price averaging over $500k per store looks high for stores with an AUV of under $1M. And it would be if real estate was not included. So about all we do see is confirmation that store ops alone went for some unknown increment less than "half of AUV" (half of AUV being a sometimes ballpark valuation figure for QSRs without real estate).

February 28, 2012 - 08:05am

Low Margins.

The filing also demonstrates what's going on with Yum Brands in the U.S. Their franchisees are failing due to tight margins that make debt service and reinvestment near impossible.

Perhaps there is a sweet spot for multi-unit store ownership in today's competitive enviornment. Obviously, owning 110 units didn't make money. Selling it off in packages of no more than 4-5 units would create economic efficiencies for the franchisee operators in areas of labor and food.

Is it time for the big U.S. franchisees to break-up and rebuild elsewhere?

February 29, 2012 - 14:54pm

Store Valuation

Granville: one has to begin somewhere to build and benchmark store level M&A data. Of course, we'd like to have a real estate breakout. But that is what experts and research is for. It's very clear there is a EBITDA margin shortfall here versus what is needed to recapitalize, remodel, pay debt service and grow, which is the point.

February 28, 2012 - 09:44am

Accounting

John, from the Restaurant Monitor story from about a year ago, "The lenders also said in a filing that they were invited to look at financial documents at Kazi's offices, but some documents were in Hershey, Pennsylvania, others in Studio City, California, the Virgin Islands or St. Croix. "The fact that a single business enterprise with annual revenues approaching $200 million reports that its accounting records exist in geographically diverse locations is further evidence of likely fraud and self-dealing, but certainly gross mismanagement and incompetence.""

Is this level of accounting incompetence usual amongs the KFC franchisees? Or was Kazi Management just being strategic with its disclosure?

February 28, 2012 - 17:39pm

Michael: My best sense is

Michael:

My best sense is that the lenders were being artful and expressive in their pleadings.

Kazi has operations in multiple states and it would not be out of norm that records might be in several states. But the Chapter 11 actions were being worked in NY, FL, MI and MD, and one can see that records in other jurisdictions...might not be meaningful to those four Chapter 11 actions.