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Log In / Register | Aug 20, 2018

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michael webster's picture

What is the Money For?

Ian McBean asks:

"Although this whole business securitization of franchise systems is appreciated by analysts, Church's may note that these instruments have been known to bring down franchisors. What does the company need to incur $245 million in high-interest debt for?"

Fair question.  They effectively go from being the owners of the property [trademark] to property managers.  Property managers have an incentive to treat the tenants poorly as long as the rents are being collected - spend their time looking for other work, while collecting money to manage the property.  They also have the traditional incentive of spending the owner's money while receiving kickbacks from vendors.

Church's has about 1,000 US units, but no franchisee association.  They have been effectively sold 3 times in since 2003 by private equity.  Their franchisees should probably talk with either the Hardees' franchisee association or DDIFO to get some information about what this change may mean for them.

New Church's Debt means..

Since its a PE firm involved, we don't know if other, more costly debt was retired.

It likely means...a payout to the PE folks involved....

Church's New Debt

For PE the opportunity is to restructure the franchise system. Church's has plenty of corporately owned stores and owns the underlying real estate. Here the opportunity is to lighten up and re-franchise their corporate owned portfolio. Hold on to a handful of stores for concept development, cash out the equity, use existing royalties to pay down the new debt, and recapitalize again over the next 3-5 years. New franchisees will be bought in to grow the brand as long as store level economics are attractive.